IMPORTANCE OF FINANCIAL KNOWLEDGE - PART 4

The Path the Middle-Income/Salaried People (MISP) need to take will be slightly different from the one taken by the High-Income and Highly Paid Salaried People.  But the Basics remain the same.  The biggest problem of the MISP is their Attitude.  Most of them feel that their Income is insufficient to warrant any Saving or Finance Planning. Some tend to believe that they are dealt with a hard hand by Destiny.  The MISP generally qualify has the ones who earn slightly more than their necessities.  The Aspirations and requirements outweigh their Income.  Sitting quiet and blaming their fate is not going to solve the Problem.  Anyone who Earns is a potential Saver.  The Amount saved might be different but the ability to Save is matter of willingness and discipline.

 

Wear Safety-Jacket First

 

The first thing the MISPs need to do is to secure their life and that of their Spouse if their Spouse is also an earning Member of the Family.  Financial Security and Contingency should be the foremost priority as they cannot leave their family to suffer financially, should anything untoward happen to them.  

 

Life Insurance is the first step.  The term and purpose of Insurance is not correctly understood in India.  Insurance is meant for Financial Safety and protection.  But it is often understood as an Investment Product or Tax Saving tool or a Corpus building mechanism.  Pure Insurance policy is a Term Plan that has a smaller premium amount and provides Financial protection to the nominee in case of the death of the Policy Holder.  If the Policy holder survives the Term, no returns are given by the Insurance Company.  This is the simplest and cheapest form of Insurance.  The premium per year is very low for younger people.  For a 30-year-old, a policy of 1 Crore might attract less than 20,000 per year as premium.  This high coverage – low premium, conventional Insurance Cover is the perfect for MISPs.  In case of an untimely death, the family is supported with an enormous amount of Money, when helps them replace the loss of income caused due to the death of the Earning member of the Family.  The other purpose of such Policy is to have enough Insurance Cover to pay off Housing Loans, should something happen to the Earning Member of the Family.  

 

The next biggest troublesome intruder is the Medical Expenses.  When someone might fall sick is beyond anyone’s guess.  The MISPs should get into Mediclaim policies for the entire family to face such situations.  If the Employer has provided Mediclaim policy, one must review the details of the Policy to understand how much the Coverage is and who are all covered under the policy.  All efforts should be made to Include the Parents under the Policy.  If the Employer is not providing any Mediclaim Policy or if the Policy is insufficient, immediate steps have to be taken to select a good Mediclaim Policy for the Family.  It is better to go for a Group Policy for the Entire Family (Including Parents).

 

Know the depth of the Water before you Jump In

 

With the safety measures taken, the next step is to know the financial requirements at different stages of life.  Financial Planning cannot be done with knowing the requirements.  The next step is to chart down your scheduled commitments, like College Admissions, Wedding, Purchase of House, etc, when it is required and how much money is required for each Item as per today’s cost of living.   

 

With the wish list out of the way, the next background work required is to prepare a Budget for living expenses.  The Budget should cover all the Basic Expenses required for Living without the Wish List Items.  To start with you can do a Budget for a Year.  Once you start living within the Budget, you can expand the scope to 3 years.  If you can make a long-term Budget, it is always better to revise the budgeted amount year-on-year to accommodate Inflation and other requirements.  For Example, you child might be too young to go to school this year but will start going to school the next year.  So, when you prepare budget for longer period, you need to keep in mind the additional expenses of School Fees, Transportation, Uniform, Books, etc.  These are expenses that will force you revise your Budget year-on-year.  To cover the inflation, It would better to increase the expenses by 8% year-on-year.  Always, remember, no Financial Objective can be achieved without Planning and Discipline. 

 

Budgeting will help you assess the free cash available every month.  Always keep your Income level as you receive it today.  Increment is optional from your Employer.  Hence it is not advised to assume an increment and predict more free cash.       

 

(To be continued...)

 

(The above article was written for publication in Aug. 2019 issue of PRINCE’S VOICE – A Community eMagazine)