Troubleshooting & Refreshing the Personal Finance

Troubleshooting & Refreshing the Personal Finance
KIRAN KUMAR K V



“You do pay
a price for your Financial Freedom, but it is far lesser than what you pay for
a Lifetime Slavery”
– (quotes Manoj Arora in his book “From the
Rat Race to Financial Freedom
”). Financial freedom is one’s ability to have
zero worries about future financial needs. Is it a practical possibility?
Definitely not. Does it mean we can ignore this aspect of life? Does it mean we
focus our energy & efforts towards maximizing our earnings, and overlook
the management aspect of what’s already been earned? Professional financial
planners disagree.

Personal financial planning is…

Personal
financial planning can be defined as a step-by-step and a continuous process of
forecasting the future financial needs and structuring a route map to achieve
them. The process involves assessing one’s financial health, in terms of income
stability, expense control, asset-liability match and risk appetite. It’s a
self-introspecting process. Each individual’s finances are unique and
challenges are specific. Personal financial planning is not a problem solving
exercise, by the way. Every individual’s financial needs and provisions would
generally be already matching. It’s just that, there lies a need to identify
the need and ensure, which source of cash flow could be attributed to a
particular need. The entire process finally delivers a framework or a
structure, which connects all the dots in one’s finances.

To start with…

As mentioned
already, financial need of every individual, is not something created out of
the blue. It is already existing. The planning process identifies the same,
puts in the timeline of individual’s life, quantifies the same and computes the
gap in the quantity to be attained to meet the goal. These financial goals can
be:

  •   long-term goals like children’s education, marriage,
    estate creation, philanthropy, or retirement
  •   medium-term goals like housing, entrepreneuring, or
    having a baby
  •   short-term goals like clearing of debt, house
    renovation, owning an automobile or purchasing of jewelry.
Each such
goal need to be estimated with as much accuracy as possible, same must be quantified,
after accounting for inflationary effects and checked whether any of the
existing asset can take care of the same. If there is any gap found, a plan to
fill the gap through further savings needs to be identified.

Troubleshooting with Hygiene Factors…

The
financial planning process focuses on the future. Planning for the same and
working towards executing the plan is an ongoing process. In the process, it
should not be ignored that there are certain hygiene factors that need to be
maintained. No individual starts financial planning, the very moment he starts
earning. The planning can happen anytime during the lifetime. Before one begins
planning for future, it becomes important to check whether these hygiene
factors are present in one’s financial health. If these factors are absent, one
may have to first ensure these are taken care of, before even future is planned
for.

The hygiene
factors to be troubleshooted can be discussed in the form of a checklist.
Questions to ask are:

I.           
Do I have enough liquidity to take care of my
expenses in case of unexpected stoppage of earnings?

It is said that at least six months equivalent
of one’s expenses should be available in cash/bank balance form, which could be
accessed within hours of an emergency striking the individual or his family.
The emergency could be loss of job, meeting with an accident or may be a
demotion in the job. A simple process to follow:
a)      Estimate the
monthly expenses on a liberal basis, let’s say Rs. 40000 a month
b)      Multiply the
monthly expenses by 6, i.e., Rs. 40000 X 6 months = Rs. 240000
c)       Deposit Rs.
240000 in a no lock-in fixed deposit (preferably a sweep-in account with your
bank)
II.           
Can my dependents continue the same lifestyle in
case of my sudden demise?


The need for insurance for securing the
lifestyle of the dependents in the instance of unforeseen demise of the
breadwinner of the family cannot be overlooked. A calculation of human life
value as a present value of all future earnings of the individual can be taken
as a thumb rule figure and typically a term insurance product can be a good
solution for the same. Below is an illustrative details of various term plans
one can consider. A standard 35 year old male’s case is presented.
Company
Sum Assured
Coverage upto
Age
Claims Settled
Annual Premium
ICICI Prudential
Rs. 1 Cr
65 Yrs
96.20%
16059
HDFC Life
Rs. 1 Cr
65 Yrs
95.02%
16507
Max Life
Rs. 1 Cr
65 Yrs
96.95%
13017
Aegon Life
Rs. 1 Cr
65 Yrs
95.31%
11146
PNB MetLife
Rs. 1 Cr
65 Yrs
85.36%
12651
Birla Sun Life
Rs. 1 Cr
65 Yrs
88.45%
13806
Canara HSBC OBC
Rs. 1 Cr
65 Yrs
92.99%
10980
Edelweiss Tokio Life
Rs. 1 Cr
65 Yrs
85.11%
11743
Future Generali
Rs. 1 Cr
65 Yrs
90.26%
11963
Bharti Axa
Rs. 1 Cr
65 Yrs
80.02%
12880
Aviva Life
Rs. 1 Cr
65 Yrs
81.97%
13039
TATA AIA
Rs. 1 Cr
65 Yrs
96.80%
13110
IDBI Federal
Rs. 1 Cr
65 Yrs
84.79%
13961
Bajaj Allianz
Rs. 1 Cr
65 Yrs
91.30%
15929
SBI Life
Rs. 1 Cr
65 Yrs
93.39%
21827
Source: www.policybazaar.com (09-March-2017)
III.           
Am I prepared to tolerate medical expenses, if
any were to raise unexpectedly?


A health insurance that promises to bear the
unexpected medical expenses that can arise due to any of the dependents’ health
issues, is a must have. The sufficient coverage amount depends on the place
they live in, pre-existing disease, family health history and also the kind of
hospitals, one would prefer to get treated at. For a standard health plan
covering a family of 35 year old male, 32 year old female and a 5 year old
child may cost in the range of Rs. 8000 – Rs. 13000. One may have to be careful
in checking the other features, terms, conditions of the plan. One should be
aware that a health insurance can be a critical illness insurance or a
mediclaim insurance plan. Other factor to consider include the coverage provided
by the employer.

Company
Sum Insured
Annual Premium
Religare Health
Rs. 5 Lacs
11836
Star Health
Rs. 5 Lacs
9630
Apollo Munich
Rs. 5 Lacs
12622
Cigna TTK
Rs. 5 Lacs
12016
Aditya Birla Health
Rs. 5 Lacs
11842
Max Bupa Health
Rs. 5 Lacs
11819
Royal Sundaram General
Rs. 5 Lacs
11250
HDFC Ergo
Rs. 5 Lacs
11977
TATA AIG
Rs. 5 Lacs
13244
Bharti Axa
Rs. 5 Lacs
13039
IFFCO Tokio
Rs. 5 Lacs
8281
New India Assurance
Rs. 5 Lacs
8060
Universal Sompo
Rs. 5 Lacs
8713
Liberty Videocon
Rs. 5 Lacs
12606
Source: www.policybazaar.com (09-Mar-2017)
IV.           
Am I debt-free?

On a stricter sense, holding even a credit card
is discouraged for individuals by financial planners. The only debt one should
go for in his life would be a mortgage towards his first house. Personal loans,
auto loans and cash credits have the potential to disturb the financial
well-being of the individual and act as a gridlock. Even if someone is already
committed to these debts, it is highly advised to exit at the first chance
available. In addition, one must also ensure the debts (including the mortgage
debt) need to be separately insured, such that, in the event of unexpected
demise of the borrower, the dependents would not be pressurized to sell the
underlying asset to clear the outstanding.
V.           
Is my immediate family member well-informed of
all my finances?


Ideally, the spouse should be aware of the
financial aspects of an individual, including the details of bank accounts,
savings plans, insurance plans, contact persons, document source, passwords, if
any, and preferably a written document of the future plan. In the case of
estate holdings, it is advised to have the Will drafted and registered.
It is advised to maintain a set of these documents, one could be kept in a safe
locker with a bank, and a true copy of the same can be maintained with easy
access to the family members.

The above
five self-introspecting items need to be answered positively, before proceeding
with the long-term financial goal planning. These are hygiene factors of any individual’s
financial health. This ensures the troubleshooting of the issues,
if any in the system and refreshes the financial system of the
individual to proceed to create the structure of meeting future financial
needs.

Individuals need to plan their finances, because…




In the words of AC
Grayling, a philosopher & author – “we all live because we have hope,
and want to see what happens next. I hope that lots of people live because they
know life at its best can be wonderfully good, and want to help make it so; and
that is a great for living
”. In a sense, an individual’s goal in life is to
make best use of his existence, make it meaningful, purposeful and be hopeful
of tomorrow. And that requires sufficing certain material needs, in addition to
maintaining emotional peace. Such material needs come with a price. The uncertainty
that one may end up not being able to meet a certain material need in the
future, creates fear. This state can be avoided with a financial planning
exercise well in advance. A planned approach to one’s finances leads to “Life,
Liberty and the pursuit of Happiness
” (the famous phrase in the US
Declaration of Independence
).
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