Financial Planning for The Young : Part 2

Hope you read the previous blog. I talked about saving towards your first corpus – an online fixed deposit on Bajaj Markets (or a number of fixed deposits) or a tax-saving investment like NPS, adding up to fund your monthly expenses for 4–6 months. This is the typical duration needed to find a new job if you lose your current source of income. This is on the assumption that your salary is your primary income.

Congratulations, if you are on your way to completing this first step. But remember this is just the first step. Thinking of a plan for the future is overwhelming. Breaking it into small chunks with the first step of achieving savings is a great start. Now with this cushion to take care of the unexpected, it is time to think about protection through an insurance policy. If you previously didn’t have enough to pay for insurance, it is time you get some of this out of the way. Of course, with government measures, health insurance and accident insurance are in everyone’s reach. Let us assume you need something more than the bare minimum the PM Yojana offers –

What protection do you need?

When you are young, health insurance may seem frivolous. Paradoxically, this is precisely when you can get it at really low premiums. Assuming you are a young non-smoker with no prior history of illness, you can get good health covers for around Rs 198 a month! This takes care of unexpected expenses due to hospitalization. I would strongly recommend if ageing parents are dependent on you, ensure they have adequate insurance as well. Health-related expenses are some of the most common reasons for people losing all their life savings. Having health insurance with a cover for 50% of the annual income should be good protection for the average individual.

My personal opinion is that if you have no dependents then you don’t need life insurance before you get married. You are better off using that premium amount to be invested in a higher-yielding solution than an FD.  This is the point when I strongly recommend investing in yourself to have financial literacy. I have seen so many highly educated individuals who are financially illiterate. Hmm…am I financially literate you ask?

Here are 5 questions to help you determine if you are financially literate:

• Credit cards are awesome. I just pay the minimum and roll over the outstanding to next month. I am waiting for my bonus to pay off the outstanding. (great decision/bad decision)
• My parents told me to invest in LIC. So I started paying for LIC every year. (great decision/bad decision)
• Anything left after paying for the LIC policy, I put it in the FD. I don’t want to take risks. (great decision/bad decision)
• My goal is to save enough to buy a house and gold jewellery. You can never lose money in these two investments (yes/ no)
• Should I take a home loan to save on taxes? (yes/no)

Remember your choices. I will answer each in great detail. For now, let me share my perspective on the “right” choices for each. I will explain them in my next blog. Please share your comments on the “right” choices I recommend below.

• Credit cards are awesome if you pay the full amount. Paying the monthly 2% or more is a crazy 24%+ annual interest. Don’t do it. Bad decision.
• We all respect our parents. Unfortunately, they grew up at a time when there were very few options to invest their savings. Blindly going for a LIC without evaluating all other options puts it in the ‘not so great decision’ Read about index funds or large-cap mutual funds or even short term debt mutual funds.
• Real estate and gold never lose money. It is an amazingly strongly held opinion despite the facts that indicate otherwise. They are just about match inflation and GDP growth rates in the long term. Bad decision if you invest in these before mutual funds! I will recommend a ladder approach to build your portfolio in my next blog.
• Would you spend Rs 100 to save Rs 33? If you said no, then think twice before taking a home loan just to ‘save’ on taxes. This is another widely held belief I put in the bad decision bucket. Do share your comments on this.

If your choices match my perspectives listed above or if you have at least considered them before making a different decision, congrats! You are definitely financially literate. For the rest of you, revisit your choice. I will elaborate on the choices in my future blog.