( 1 ) Have a plan, be rich
this is, perhaps, one virtue that can neutralize the impact of various financial sins. A plan acts as a guide through your financial journey and, even if domestic and global upheavals dent your investments, it will help you get back on track. At the macro level, planning affects every aspect of personal finance, be it taxation, insurance or achievement of goals.
It can cut losses, enhance gains, and avoid the pain and panic of a financial or life stage crisis. At another level, a plan is a simple matter of listing out your needs and wants, and deploying the money in right avenues so that you have it when you need it. As a first step, calculate your existing worth and identify the goals for which you will require money in the future. Calculate the exact amount required for each goal after factoring in inflation and the time horizon in which you want it.
( 2 ) Start early, save more
Find out your risk-taking ability and then pick the instruments you want to invest in (asset allocation). Link your investments to goals and you will not have to scrounge around for money when you need it. Build a plan the minute you are employed because you can invest without straining your finances and without the burden of responsibilities.
More importantly, it will help you gain from the power of compounding. So if you wake up to the need of a retirement kitty at 40, you are likely to save much less than if you started at 25 (see graphic). It is likely that your planning will go for a toss in a market collapse like that of 2008, but will typically stand you in good stead through most ups and downs.
( 3 ) Secure your family & finances
most people are so intent on investing and building assets that they forget to cover their risks. Since it is crucial to secure your family and finances by creating an adequate insurance portfolio, this is the second constant that does not change with time. A majority of the people buy insurance to save tax and as an investment, with life insurance the second most favoured investment destination after fixed deposits, accounting for 25% of the wealth of small investors.
However, it is important that you do not mix your insurance and investments. The base of your insurance pyramid should comprise pure protection plans. These cover the risk of death (term plans), health issues (medical plans) and accidents (accident/disability covers) (see graphic).
The amount of cover you take, be it life or health will depend on your life stage, income, dependents and requirements. Next, consider insurance policies that can help you reach your goals. These include traditional (endowment) and child plans, and finally, buy plans that can assist you in creating wealth (Ulips). The other important insurance plans that you should buy are those that cover real estate and household content. These are quite inexpensive, with the essential covers costing you less than Rs 2,000 a year.
( 4 )Never ignore taxes
much like death, taxes will never go away. While rules and slabs may change from time to time, taxation itself will not. In fact, it affects every aspect of your finances, from income and allowances to investments as well as the assets you buy or sell. So, stop ignoring or pushing it away.