11 Financial resolutions for 2021

The beginning of the New Year is always the best time to give another chance to the have not’s or have a ‘Fresh Start’. This year has been one train wreck, especially when it comes to finances. Everyone’s finances have gone for a toss and many a financial trains might have completely derailed.

The bells of New Year are not far and time to make a list of the 10 most important financial resolutions plus one for good luck before entering 2021 to get our train back on track.

1 – Paying off the debt – Global debt reached a record high of 258 trillion dollars in the first quarter of 2020. Indian household debt stood at nearly Rs 43 trillion just by end of March up from Rs 19 trillion in just 5 years ago. The increase in household salary is 4.3 percent versus increase in debt is 17.7 percent as compared to 2015. This year with slow or no business, job cuts and pay cuts, debts have increased for almost everybody.  With the benefit of moratorium, all that individuals have managed, is to postpone the inevitable, with the extra burden of having to shell out extra money as interest. Non-payment of debt not only invites loan collectors to your house but also harms your CIBIL or credit score lowering your chances for access to finances and other financial services as required by you in the future.  Make sure to the make payment of debt as your number one priority of the New Year to not only improve your credit score but also reduce your financial burden.

2 – Be informed before taking loan – there is rarely any individual who does not have a debt. I am sure half of you after paying off your debt will go back to the same bank to get another one. Make sure to do your research about the rate of interest and make sure this time around your Annual debt payment do not increase more than 40 percent of your gross income.

3 – Be prepared for financial destruction – 2020 has probably bought the whole world to a standstill whose financial ramifications will be felt for next few years.  This year is a lesson ‘Anything can happen anytime’. Be prepared at all times for financial emergencies. No harm in mentioning it AGAIN to have emergency funds of at least three month of mandatory expenses in liquid or absolute cash form. (I know you are tired of reading this but despite that I come across people who have not done it.) Get your finances in order along with emergency funds and inculcate the habit of regular savings and investing.

4 – Insurances -time and again the topic has been delved upon. But just recently, I was talking with a client who got redundant due to Covid and whose only medical insurance was from the company despite advising him to take an independent Medi- claim. Due to Pandemic the medical inflation has reached to 19.5 percent from 18 percent in 2019. Medical treatments are expensive and due to Covid-19 and new guidelines in place the cost of treatments in hospitals have increased. Not only medical I think this year has proven life has no guarantee. Make a list of insurances – Medical, Life, Car and Home and get them in order. This is known as Risk management and the foundation of a good financial plan.

5 – Involvement of family – family plays an important role in financial planning. Initially only the men of the house would handle the finances. Although now things have changed for the better but traditions die hard. In fact forget men now the number of women entering business has increased more than men. Just recently a family friend who had a roaring food business died of sudden heart attack. The lady was extremely successful. But she use to never discuss financials with her husband. The husband was clueless about the money which he had to receive from her clients. A very important part of financial planning is involvement of spouses. Have a file which lists down all your accounts with amount outstanding, in one place along with all the details be it insurances, mutual funds or shares, outstanding debts or debt to be received.

6 – Financial Planning with regards to education to your kids– a VERY important part of your kids overall education and development. I mean, why give other examples I will give my husband example who loves taking my kids to toy shop every alternate Sunday. Thankfully due to constant drilling in their heads since their childhood my kids will first check with me and only then will pick up something or might just pick up a book (which is totally fine). I have always given them a target as to if they want a toy they need to save for it. Let me list down 3 points on Why financial literacy is important at a young age – 1) – Financial illiteracy breeds irresponsible adults, 2)- Easy to pick up bad financial habits, 3) – Better prepared for emergencies. So at a young age, inculcate financial education to raise savvy investors and avoid debt traps.

7 – Sort out your Estate – Estate planning always a last priority. Do not avoid it. Bear in mind settling your affairs after you have gone is a costly affair one which can have adverse impact on family equation. Remember – Estate Plan protects the beneficiaries, protects your young children, eliminates family feuds, and can save from shelling our big tax money. Remember – Estate Plan is NOT only for rich family. Sort out your estate, insert nominations and make sure to settle any disputes or dues you have so as to not leave your debt as legacy.

8 – Pyramid Planning – recently I had written an article due to which I got calls and mails from many young investors which was impressive but at the same time when you ask them the usual Financial Planning questions about when they need the money, how long they want the investment for, are their insurances in order that’s when they are clueless. Remember – 1) – Emergency planning – 2) Risk Management – 3) Investment Planning – 4) Tax Planning – 5) Retirement Planning – 6) Estate Planning.  Follow this hierarchy to build a strong and methodical planning which has a strong foundation which no pandemic or catastrophe can shake.

9 – Tax Planning –‘Tax’ word gives the jibbers to everyone and people try to postpone it to the last minute. Invest smartly from the beginning and take advantages of the investment options that offers maximum tax advantages. Resolve not to invest in ‘Benami’ assets to save tax as if caught there is heavy penalty. Plan for taxes in advance to avoid last minute investments to save taxes which might not only yield much but also your money will be stuck due to lock in period. Tax planning is equally important.

10 – Develop a set of new skills – Future holds lot of uncertainty. Just like emergency funds if possible develop new set of skills or an alternate way for earning so as not to face financial hardship in future.

11 – Resolve to follow your resolutions – last but no way the least as wisely said by Suze Orman, American financial advisor and Author, “Ever achieved financial fitness with a January resolution that’s abandoned by February.” Make sure to follow all your financial resolution to avoid being in a bad financial place!!

Mental health and financial distress

Coming from a family of doctors, recently I was chatting with a very close family friend who is a very senior and experienced psychiatric doctor. Of course the topic of discussion like in most households these days revolved around the recent pandemic.  He was telling me that he has become twice as busy than before due to the deluge of patients who have succumbed to extreme stress and anxiety in the wake of this pandemic. Fear and anxiety of contracting this virus, the fear of unwittingly infecting their loved ones, economic loss and most importantly the fear of death, has pushed people to the edge.  The most hard-hit are the people who were already suffering from some form of mental illness, because this is like their worst nightmare coming true. The lockdown has made this human race which thrived on social contact feel lonely, alone and scared of the unknown.

But this psychiatrist friend ours, pointed out that many of these stress and anxiety related patients had one thing in common and that was- Financial insecurity and instability.

Mental health issues and financial problems are interlinked intricately.  And it would be wrong to think that only the underprivileged sections are affected by financial stress, in fact many well-to-do people who have money and can withstand such setbacks are equally affected.  Although one man’s trash can be another man’s treasure so we are comparing apples and oranges here. Millions have lost their jobs and their livelihood, thousands have had to leave the cities where they were working and return to an uncertain future with no means of feeding their families who relied on their income.  The middle class too has had to bear the brunt of this curse.  There have been large scale layoffs in most companies, almost all have had to face pay-cuts and are not finding any new jobs.

All this while their expenses have remained more or less the same.  They have had to pay their bills, their groceries, their medical expenses and most dangerous of it all EMIs, be it home loan, vehicle loan or personal loan.  Finally, the so called upper class, we might feel that what have they to worry about, but higher one goes, the harder one falls.  Many have had to pay their employee salaries out of their own pockets in the wake of zero income, many sectors have completely shut down with no signs of revival in the near future such as tourism, wedding and celebration related allied industries such as catering, decorators, etc; the list is endless..  Many of these so called big names have had to close their outlets, reduce staff, run from pillar to post to recover money from their debtors, and many have filed for bankruptcy.

The fact remains, that this once in a lifetime crisis has affected us all and affected our mental health knowingly or unknowingly.

All these stressors lead to a gamut of psychiatric illnesses such as

  • Anxiety,
  • Depression,
  • Post-Traumatic stress disorder,
  • Obsessive Compulsive Disorders (OCD) to name a few.

The boarder terms fall under the heading of ‘Psychosomatic Disorder’ that is effects of emotions causing problems like asthma, depression, stomach ulcers, anxiety, heart problems and others.

The recent pandemic has increased the number of cases of psychosomatic disorders two fold. And its high time we talk about it.

Let us understand the vicious cycle of financial problems and mental problems.

Financial problems due to mental problems

  • Mental health problems makes it harder for people to be motivated and go out and earn money and this further pushes people into financial despair. As people with anxiety or depression have a hard time being focused on the job at hand.  This decreases their productivity and efficiency in their jobs.  Thus they are generally not given any important jobs, which limits their growth in the company, they are not promoted or given salary hikes in comparison to their colleagues which develops a feeling of despair, anger, frustration, self-loathing and even animosity towards their colleagues and bosses.
  • Many a times individuals with depression or loneliness go out and spend on things that give instant but short lived gratification and many enter into vices such as alcohol, drugs, etc spending spree just to cheer them up.  They spend every penny to fulfil these vices even resorting to crime to earn money for this vices. All these empties their life savings and even put them under debt.
  • People suffering from mental problems suffer from memory problem and rational thinking and they end up marking wrong financial decisions or rely on others to make decisions for them, ultimately leading to financial loss or a fraud.

Maintaining an expense sheet is a difficult task even in normal circumstances, but for individuals suffering with a mental illness, it is almost inconceivable as they have lost interest in everything.

  • Individual suffering from mental health often go into a shell where they stop communicating and paying attention to daily details often leading to nonpayment of basic bills resulting in compounding of bills and penalty charges.

The above financial problems act as a fuel to the already burning fire of a patient’s internal anguish and pushes the person to the edge where the mental problem aggravates to the point of suicidal tendencies or antisocial tendencies like causing harm to others.

The biggest financial problem as cited by the doctor was the inability to pay the ‘ EMIs’ every month, thanks to the cheap bank loans provided without any collaterals. Also, plastic money has been cited as an additional problem as a person spends haphazardly since he does not need to open his wallet. During the time of this pandemic with a complete lack of income and using up of all savings, the end result is nonpayment of instalments of loans and credit card debt. The constant harassment by loan recovery agents and their threats adds to this stress, fear and anxiety problem.

A few pointers to avoid this scenario in the future.

How to control debt?

Debt if not controlled can spiral out of control easily which in turn becomes a fuel for mental health burnout. The best way to control debt is to maintain a constant check on the Debt servicing ratio. This ratio states how much EMI is going from your total gross income. The ideal ratio is 40 percent. Which means, if more than 40 percent of your income goes towards paying EMIs the alarm bells should start ringing and one should try to pay off the existing loans and refrain from taking any further loans.

Savings– do not forget to keep aside the emergency fund of at least 4 months of mandatory expenses and make sure at least 15 percent or more is going towards savings.

Taking care of your mental health as much as your physical health: start by believing that “This too shall pass”. Keeping yourself busy in some work. Pursuing a hobby like music or painting. Socializing with people even if its 6 feet away. Exercising, practicing yoga, doing breathing exercises, always keeping a positive attitude. And if you feel you need help do not shy away asking help from your family and friends. Sometimes knowing that you have someone who understands you is therapy enough.

Seek medical help if required: In a survey in 2017 it was seen that nearly 150 million people in India suffered from mental health problems but less than 30 million are seeking care.

Unlike in many other developed countries, India does not have any dedicated support system for mental health patients. The problem with majority of our Indian population is that we still equate mental health problems with insanity.  And going to a psychiatrist is considered a ‘Stigma’ or ‘Mortal sin’.

Everybody needs help at some time and there is no shame in asking for it.  Any mental distress or problem, when detected early either by oneself or by their loved ones can be fully treated by a trained doctor and can prevent the problem from reaching a stage of no return. As wisely said by Michelle Obama, wife of ex American president Barack Obama, an author and American attorney, “It is time to tell everyone who is dealing with a mental health issue that they are not alone, and that getting support isn’t a sign of weakness, it’s a sign of strength.”

Family should look out for signs of anxiety, depression, change in financial habits be it excessive spending or ignoring bills or an ability to not hold jobs for long or signs of avoiding people. All these are red flags and should not be ignored. Seek professional help and prevent a destruction of a beautiful mind!!!

Tips to save money during retirement

We work hard throughout our life so that we can enjoy the retirement years without worrying about where the next meal will come or from where money will come for medicines. Recent Statics show that people are retiring at a younger age and life expectancy is growing. The Average life expectancy of an Indian has increased from 60 years to 75 years. So more number of years to provide post retirement. Even if we have saved adequately a few bad years can bring down your investments. In the recent pandemic many senior citizens income have taken a hit. Cost of living is going up. There is no harm in cutting down a few expenses to maintain a comfortable lifestyle. Here are few expenses you can cut down to save that much extra post retirement :

  • Downsize – your kids have grown up and moved out. If you are staying in a big house there is no harm in downsizing. As cost of maintain a big house is more as that many more hands you need for upkeep of the house. Downsizing helps in huge savings as far as maintenance of the house goes.
  • Selling the extra car – downsizing also means in cars. If kids have moved out no point in keeping that extra car. Right time to sell that extra car saving on fuel as well as maintenance of the car and insurance.
  • Expense Sheet – no harm in maintaining an expense sheet even after retirement. You might be surprised the number of expenses where you can cut down and where the amount has gone up. So accordingly you can readjust your monthly budget.
  • Avoid debt – even if you are planning a second career please do not think of taking debt. In fact try to finish off all your debt before retirement so you can have burden free and peaceful retirement without constantly worrying about paying your EMIs.
  • Make sure medical insurance premium is paid on time – Do not Do not forget to pay your medical premium amount. Even if you don’t wish a big chunk of expense post retirement forms is for your medicines or health related. So make sure your medical insurance premium amount is always paid on time.
  • Deals – everyone is offering deals when it comes to Senior Citizens. Do not shy away to say your real age as that can save you money on Airlines, railways, hotels, many restaurants and other places. Whoever I have spoken with have one goal post retirement to travel. Look out for deals for senior citizens and you will realize your travel will cost will almost come down by almost 25 percent.
  • Reevaluate your insurances – besides medical insurances you can reevaluate your life, home and auto insurances. If you are not sure about your investments then one spouse can continue having life insurance. Home and auto insurance can be downsized along downsizing the house and car.

A person should not reach a stage where he has to think for every penny spent post retirement. Next article will be on what expenses should be taken into account while calculating amount required to stay comfortably post retirement. Stay tuned…..

Avoiding these Money Mistakes in ‘2020’

‘2020’ can be one year which everyone would like to wipe out from their calendar. Everyone were hopeful that this pandemic will end within two or three months. But as time went by everyone realised that’s not going to happen. That’s when the financial ramifications of this pandemic started hitting everyone. Read More

Life post Coronavirus or Rightly saying Finances after coronavirus

Emergency !!!!!  there is only one thing going around in News, Social media or in any conversation, we have with anyone now a days.  – Coronavirus or infamously known as COVID – 19 has wreaked havoc in everyone’s life.  In fact now people are scared even to sneeze or randomly cough in public in fear of being ostracized.  Along with the health concerns, the financial ramification of this virus is also worrying everyone. Moody’s predict that we might never come out the economic ramification of this virus. And top leaders of our country passing statements that we will be going back by 21 years in this 21 days lockdown, definitely dampens everyone’s spirits. With countries being in lockdown and markets and businesses being shut down everywhere, there is an almost certain global recession looming large in the future. These are exactly those emergency times for which Financial Planners warn people to be prepared for.

We can’t do much about the medical emergency of this virus, but we can definitely create a plan for the financial emergency which we are facing today and for the uncertainty looming about our near future –

Assess your current situation – with businesses shutting down, it is hard times for all of us for a foreseeable future. Assess your financial situation. How much liquidity do you have with you right now and how much will you need in the near future to tide over this crisis? With government announcing Three Months Moratorium you might say nothing to worry. But would disagree as if you have liquidity would recommend to continue your loan and not take moratorium. And even if you opt for a moratorium trust me this problem is not going to vanish overnight. It is always best to be prepared. You need to be prepared for at least the coming three months. So make a list of your mandatory expenses –

  • EMIs of loans or Rents
  • Insurance premium
  • Utility Bills – electricity, water and phone.
  • Daily essentials
  • Credit card dues

You need start accounting for these above expense heads and multiply it by times 2 or 3 and then assess whether you have enough funds to cover these basic expenses for at least the next 2-3 months.

Talk with your bankers (or Landlords)– everyone were relieved when RBI announced a three month Moratorium that is from 1st March to 31st May 2020. ( What is a Moratorium – A legal authorisation to debtors to postpone payment.) Moratorium of the loans which includes all types of loans including credit card dues. But you need to understand that your interest is getting accrued and will be payable either as EMI or your tenor will accordingly increase along with slight increase in your EMIs. Do check with your banks as to how are they planning to give the three moratorium and how are they planning to collect these dues. Same goes for credit card dues. Penalty will not be charged but interest will keep on accruing. If you have liquidity with you do not take the moratorium. Keep on paying your loans and finish it off. If you have limited liquidity would recommend to finish off credit card dues. Remember even if you opt for moratorium it will not affect your credit ratings. Same way talk with your landlord for rent payments. In a few states landlords are requested to go easy with rent. Talk with the landlord and work out a payment schedule.

Investments continue hold or sell – many an investors do not know what to do with businesses on hold and for how long no one knows. If you have Systematic Investment Plans (SIPs) going on analyse your situation and take a call as to whether you want to temporarily stop them or you can continue without any strain on your finances. But please do restart them once your finances are back on track. Same goes for all your investments. Do not let this detour from financial independence path become a permanent detour. Once your life is back on track better to do a complete financial check up to see where you stand and the way forward.

Do not panic sell – remember do not panic sell your investments. In case you are short of liquidity then it is a different scenario but please avoid PANIC selling.

Check with your insurance agent – check with your medical insurance agent regarding the diseases covered in your medical insurance. If not how much is covered and what can be done. Again, be it whatever do not let your insurance lapse. Be sure to pay the premiums on your insurances.

Involvement of family – do not bear the stress of finances alone. Sit down with your family. Discuss your finances with your family. This exercise has a dual advantage – 1 – sharing helps with your stress and you can work as a family to lessen your financial burden. 2 – In case you fall sick, your spouse or family member is updated with all the financial matters and can take it in their hands.

Emergency funds – last but not the least if you already have an emergency fund or liquidity in place then you do not need to panic. But if you do not have one, then although a little late but not everything is lost. With talks about extension of lockdown its still not late to create an emergency fund.  How much should your ideal emergency fund be? After calculating your existing finances and expenses, we would recommend to keep aside at least two months worth of sum equivalent to your EMIs of loan and insurance premium and utility bills and any unforeseen expense that can arise during this period. Even if you have taken moratorium of EMIs but still after three months the load will be there.  (Although you need to keep aside cash equivalent to all the above heads mentioned but if liquidity crunch then even keeping aside money for EMIs and utility bills and insurance premium.)  Ideal is three months but with the entire economy at halt and would recommend to start with two months. Once you are through this rough patch, always remember to keep aside an emergency fund.  A word of caution – ‘ Your emergency fund is not an investment, it is an insurance with one purpose – to protect you and your family’ as rightly said by Dave Ramsey an American, show host, businessman and author. Do bear this in mind.

Remember always be prepared for emergencies, as emergency itself means something which is not in our hands.  Be safe everyone – Physically and Financially !!!!

Budget should you worry or invest wisely – finale

Budget should you worry or invest wisely

With budget around the corner and a sluggish economy, everyone is worried and eagerly waiting for the Finance minister to dish out something exciting or wave a magic wand and make everything oki!! Everyone is hoping for a tax cut or some other similar gifts. But the irony is without tax income how do you expect the government to increase spending for infrastructure and how to do you expect the government to infuse much needed money into the economy.

So how does Tax revenue affect growth?

The last two years, that is 2018-2019 and this current year, the tax revenue has decreased considerably.  In fact this year for the first time in two decades, there has been a fall in the direct tax collection. Direct taxes account for almost 80 percent of the total tax collection.  As per reports as published by the Economic times – The Income tax department has been able to collect Rs 7.3 trillion till January 23rd which is 5.5 percent below the amount collected same time last year. The Government was targeting at collecting Rs 13.5 trillion but with the decrease in the businesses cycle, this target looks unachievable.  The effects of this can be seen on government spending as well.  In the current scenario, without government spending, the revival of economy seems difficult.  Also, indirect taxes are out with coming of GST whose committee meet every month to analyse and bring out reforms as and when they seem necessary which has been far and wide and with time, the GST reforms are settling down and hence less changes happen over time.

What has tax collection should concern you regarding your investment decision?

PROBABLY NOTHING.  Although decrease or increase in income tax affects investments amount but tax rate cuts or increase should not affect your investments decisions.  Why –

  • Achieve goals – why does a person invest? Reasons can be numerous like buying a house, car, retirement, children or in general being rich. SO your investments are decisions which are based on achieving these goals and not on budget.
  • Insurances – an individual will always require medical and life insurances; budget or no budget, slow down or no slow down. You already have a tax benefit for this category and trust me, no finance minister is going to take away tax benefit on insurance premium paid. So an individual planning on renewal of medical insurance or buying new policy, should not be waiting for the budget but should just go ahead.
  • Emergency funds – emergencies come unannounced and one always has to be prepared for it. How – by keeping at least three months worth of cash’, equivalent to your mandatory expenses, aside in liquid assets. In other words, funds that are readily available. Will budget change your decision about keeping aside emergency funds?,    Even for selecting the liquid asset for investing, budget should not be a factor in your decision.
  • Retirement – retirement planning is a long term planning, especially for individuals in their 20s, 30s or 40s. You should be looking for something like a long-term Systematic Investment Plan (SIP) or investment in assets like real estate. This decision should never be based on budget, as you cannot predict every years budget’ and the changes it will have on your asset class, and churn the portfolio accordingly. In fact you will stand to lose out more than gain with such a strategy.
  • Investments – where to invest, what to invest in, how long to invest, these are all variables which are in your control and which has to be aligned with your needs and goals and not with external factors such as Budget.

This years budget is much awaited and hyped due to slowing economy and there is hope that there will be certain announcements that will make business environment more conducive to growth and consequently result in better cash flow in the our hands.

That being said, Budget is not a magic pill that can solve problems overnight.  These are problems that plague the world and are not just ours.  It will take time to get back on its feet.  Till then we have to more concerned about our own financial goals and needs and undertake investments based on these and not what the Budget has to offer.

Where should I be investing in 2020?

A very close friend of mine is the Chief Investment Officer of a very big and reputed Mutual Fund. But he is always complaining that every time someone meets him the first question they ask is where should I invest?   He gets really bugged by this. One cannot just go about giving random advises.

Just imagine if he gave random advise or names of some random Mutual Funds and stocks  or for that matter any other investment advice without understanding When they need the money and for what purpose or goal. Is this fair for the investor? I know it’s not right to just dish out random advice but the investor does not understand. Time and again it has been proved that investing on random advice is DISASTROUS!!

Despite all this I am sure by now most of you will be like get on with the article and just tell us which product should I be investing in?

Contrary to what anyone says or writes there are just this many asset classes – Equity, Debt, Commodity like Gold and Small Savings schemes. All the investment avenues fall under the above mentioned asset classes. There are sub classes which fall under the above mentioned asset categories. New funds get added or new bonds get released no new asset class.

So what would my advice be for 2020 –

INVEST AS PER YOUR GOALS AND NOT AS PER YOUR NEIGHBOURS OR A RICH FRIEND OR RELATIVE

What is right for your neighbours, relatives or friend may not be right for you. If you need money in another three years you should definitely not be looking to invest in Equity. Or if you need the amount for a goal which is 10 years away you should definitely not be looking to invest in Fixed Deposit or Debt products.

So list down your goals with the time frame you want to achieve and then accordingly plan your investments –

  • If your goal is 2 to 3 years away – definitely look into debt products like Short term debt fund or fixed deposit or Fixed Maturity Plans.
  • If your goal is 5 to 7 years away – then you can have a mix of balanced funds (with more exposure towards equity), Fixed Maturity plans, if good AAA rated Company Fixed Deposits then can consider investing in that.
  • If your goals are more than 7 years away – then you can definitely invest in good Equity Mutual Funds, direct equity or ELSS.
  • Gold – I always advise to invest at least 3 to 5 per cent of your total portfolio in Gold or Gold based Mutual Fund  as its one of the most liquid asset in the world and can be liquidated anywhere in the world. Do bear in mind buying jewellery does not count as investments.
  • PPF – a must. Its tax free with deduction available under section 80C.
  • Small saving schemes – a good investment product for senior citizens.

It is not that I am stopping from investing in good  Investment product, but just a way of bearing in mind that if I am investing in Direct equity then I know that my money can get stuck and I have other liquid asset to help me with my need.

Plan wisely and Invest Smartly!!!!!

V-Day special: Checking financial compatibility

With Valentine’s Day just around the corner, many of you would be thinking of embarking on a relationship. Also, with the marriage season just over, many of you might have already started on a wonderful journey. But if I have to ask just one question, ‘How many of you have discussed your finances openly with your spouse/partner?’ I am sure the answer would be ‘not many’.

While it is okay to overlook this aspect during your initial period of companionship, things change when you get married.

In India many women are still housewives where most of the times, they have no clue as to how much their husbands earn or how much debt they have or where they have invested money or how much is the family or their husbands are insured for. Many of you would be able to relate to this. But is it good? Definitely not.

In fact, recently, I came across a couple with severe financial trouble where the husband had lost a fortune while trading in the stock market. Before he could realise, he was neck deep in debt. To clear off his debts, he took loans. But he could not cope with repaying that too and soon moneylenders started knocking on his door. That was the time his wife realised that there was some trouble.

When things got really out of the hand, her husband finally confessed. The wife said if she had known about the problem earlier she would have somehow forced her husband to take professional help or at least put an end to his trading habit or even taken up some job to help with the finances.

We often hear this. It is an unfortunate scenario wherein husbands do not involve their wives in financial matters.

But why is it important to discuss finance and be financially compatible? Here’s why:

Financial personality: One partner can be a spender whereas the other can be a saver; or both the spouses can be spending heavily or both can be savers. If a couple knows each other’s financial personality well, it helps in charting a financial plan to save them from a lot of trouble in the future.

Goals: Every individual has goals in life. When a couple embarks on a journey where they spend their entire lives together, it is very important to set their financial goals well in advance. Every individual is different from another and so are her/his goals. Therefore it is very important that they discuss them and then set the goals, and chart a route to achieve them. Always remember to divide the goals into three parts: Needs, responsibilities and dreams and work towards achieving them.

Budget: This is the base of any financial decision or plan. “Our day-to-day expenses are common and hence I discuss them with my wife and plan for them accordingly,” says Kunal Shah, 34, a businessman who, is into the 5th year of a happy marriage.

While preparing a budget it’s necessary that both spouses sit down and discuss their expenses. Very important since they will not miss out on budgeting for any expenses but also stick to it if they have prepared it together.

Communication: It’s the key to any successful relationship. Communication between spouses also includes discussing financial matters. As seen from the above example due to lack of communication from the husband’s side, both the partners faced problems from which they will take a long time to come out of.

“Communication is probably one of the most important aspect for a successful marriage. Because these days women have an important role to share in financial responsibilities, and it is obvious that when they do it they want to participate in financial planning,” says Paolomee Adani, a 30-year-old IT Professional.

Financial structure: One of the other important reasons to discuss finances before marriage or at the start of a courtship is that you know how you are going to utilise your hard earned money. Say if the husband’s income is utilised for meeting daily expenses then the wife’s income should go into saving for their goals or future.

Many a times, husbands do not feel comfortable asking for financial help from their wives (ego problem?), which should not be the case. This understanding helps avoid any financial harm later.

Money management: Generally financial literacy of both the spouses/partners is not the same, hence the need to decide who will manage the money. In India, generally, the male in the family handles money even if he does not have the time, from his busy working life, or the knowledge to do it. This can lead to mismanagement of your money and in turn financial problems. If the couple feels it is difficult for both of them to manage their own money they should seek financial advice.

Whether you agree or not, the truth cannot be denied that money does form a very important part of everyone’s life. When you start a new life with someone you expect to understand all there is about him or her. So why should monetary aspect be any different?

The building blocks of financial planning

Arise, Awake and stop not until your goals are achieved: so aptly put forth by Swami Vivekananda. And that is what financial planning is all about!

It is about planning your money to achieve your goals within a given timeframe. Why do people toil away from morning till evening? So that they can achieve their goals! Goals can be different for different people at different times. For some it can be striving to provide for the basic necessities of life. For others it can be buying a luxury car or going for a world tour. And you can’t achieve these goals without financial planning.

The only problem is that many individuals tend to confuse financial planning with investment planning. Once they know which fund or script or investment avenue to deposit their money into, they are relieved and consider their financial planning as over. This indeed is a very big blunder.

What about insurance? Are you adequately covered or is your health insurance enough or what about retirement or emergency funds?

How we wish financial planning was that simple by doing a few simple investments your goals would be met. But the path towards our goal is never that easy.  There are steps to follow and blocks to build before achieving your goals.

Investment planning is just one part of the entire financial planning exercise. Just like a building where a strong foundation is led first and then the next levels financial planning too has to have a strong foundation.

Let us have a look at the building blocks of financial planning wherein we will learn to build each block one by one. We will start with the foundation and then gradually move upward from the foundation to the next level to build a strong financial plan. So you are financially prepared for all events in life; be it any medical emergency or your child’s education or marriage or your own retirement or health problems.

The building blocks of financial planning

Just like a building where you start with the foundation and then move upwards towards the first floor, second floor and so on, the financial planning building has five blocks to scale. The first two blocks are the foundations and then the next three levels where you actually experience the benefits of a strong foundation.

Let us have a look at these blocks, what they are and how to go about their planning:

5. Estate planning (Will planning)
4. Retirement planning
3. Investment planning
2. Insurance planning
1. Contingency planning

You might be wondering why the reverse order? Just as I mentioned we have to build the foundation and then move upwards. The foundation starts with contingency planning and then you gradually move up.

The first two blocks: contingency planning and insurance planning is known as risk management. Also in a layman’s term, it is the foundation of a good financial planning. Once this is in place, you are not worried as it takes care of all your emergency situations (contingency planning) as well as your insurance requirements (that is your health insurance, life insurance and other insurance).

Once your risk is managed, you can then safely move on to the higher levels to plan for your goals. The next two levels are investment planning and retirement planning collectively known as goal planning.  The last but not the least is estate planning or will planning.

Let us start with the foundation and the first of the two levels in risk management.

Contingency planning

Also known as emergency planning. It has been emphasised time and again that a contingency plan or an emergency plan has to be in place before starting to plan for other goals. Why? Emergencies can come anytime or anyplace especially when we least expect it. We cannot predict it or even prevent it but what we can do is buffer ourselves against it so that our life does not go for a toss due to the emergency. It is basically saving for a rainy day. So once that you have planned for any untoward or unpredicted eventualities, you can safely move ahead to the next level of the financial plan.

How to calculate?

All your mandatory monthly expenses which you have to meet by hook or by crook have to be taken into account. A list of all mandatory expenses have been given below:

Fixed mandatory expenses (which are fixed every month) include:

  • Mortgage installment
  • Car loan installment
  • Other loan installments
  • Life insurance premium
  • Health insurance premium

And variable mandatory expenses (which are mandatory but vary every month) include:

  • Food
  • Utilities
  • Grocery
  • Transportation
  • Miscellaneous (unavoidable) expenses

The above expenses have to be calculated on a yearly basis and then divided by 12 months so as to arrive at an average monthly figure.

How much to set aside?

At least three months of your average monthly expenses have to be kept aside in the form of emergency funds since it is generally observed that three months worth of funds are enough to meet most emergencies and come back on track. People nearing retirement should try and keep aside at least five to six months of mandatory monthly expenses as contingency fund.

Let us take an example: Say your yearly mandatory expense is Rs 350,000.00. Hence your monthly average expenses will come to Rs 29,167 (3,50,000/12) (rounded off). You need to keep aside Rs 87,500 (29,167*3) that is your three months’ average monthly expenses as contingency funds to meet any eventualities.

It is not necessary to keep the entire amount in cash. You can keep aside Rs 20,000 in cash and the balance you can split between savings account, fixed deposit, or liquid funds. Why? Because all of the above mentioned products have liquidity, their biggest advantage, which is a very important feature in case of any emergencies. Also, remember that in case of usage of these funds always remember to replenish it.

Now that we have covered the first level of a financial plan, we can boldly move towards the second level that is insurance planning which will be dealt with in the next article… Till then think how best you can build your first block — a strong foundation — on your journey towards a strong financial plan.