The world has learnt its lessons from an unprecedented pandemic, COVID-19. There will be huge changes in our personal as well as professional practices across the globe. If you have not learnt from it, then it is a missed opportunity.
Although there are a number of things on which we can go on discussing, I will limit the scope of this article to one's financial freedom. The whole world is waiting for two dosages of vaccination to secure ourselves from health deterioration due to corona. But I am going to discuss the two dosages of financial vaccination.
Everyone loves his family the most and whatever we do is generally done keeping in mind the wellbeing and happiness of our family. But are we doing enough? Are we investing enough to secure our future? Are we insured enough to secure our health and secure our family's wellbeing in case we are either critical or no more? Are we financially ready to face such pandemic like situation in future?
Let's talk about investment first.
Investment
Many people live lavish lifestyle, spend heavily, buy things which they can't afford or even don't need. When some adverse situation like current pandemic comes and they can't earn their regular income even for a month or two, their so called lavish lifestyle creates breathing problem for them. Many even can't afford to pay their EMIs for home loan or car loan or any other loan. They were so well off, they shy away to ask for help from their near ones.
Why we can't plan our finances well? Why we spend without first saving for our future? The formula for our cash outgo (total spending) should be total earnings less total savings. So if your formula for total savings is total earnings less total spending, please change the formula. Have a target for savings and stick to that at any cost.
Why
- To rest assured of carrying our present standard of living in case of loss of income for short term
- To create emergency fund for any contingencies
- To financially secure our retirement life
- To meet expenditure of major life events like higher education of children, marriage, etc
- Income tax benefitis an add-on in few cases but it should not be the only motive to choose an investment product
How much
- Keeping in mind the quantum of income, standard of living, contingencies and future liabilities, one should choose to invest
- The quantum of investment should increase with increase in age
For whom
- Must for earning member on whom the whole family is financially dependent
- For spendthrift people, Investment with even low return is far better than not investing at all
When
- As early as you start earning
- The later you start, the costlier it becomes in terms of opportunities missed.
From whom
Let's discuss briefly about the investments products one should choose.
1. Provident fund (PF-RPF/GPF/PPF):
Pros
- One of the safest investment
- Most essential for retirement planning
- Reasonable return is guaranteed
- Income tax benefits upto Rs. 150,000/- are available under section 80C
Cons
- Not available for immediate withdrawal as Lock-in-period is longer
2. Fixed Deposits:
Pros
- Most essential to meet contingencies
- One of the safest investment, specifically when created with financially healthy and reputed banks/Post offices
- Can be booked with well reputed NBFCs to get higher interest for people with a bit higher risk appetite
- Reasonable return is guaranteed
- Don't just fall for high interest rate, study well about the institution for safety of your capital
- Income tax benefits upto Rs. 150,000/- are available for FDs with bank for 5 years under section 80C
- Income tax benefits are available for senior citizens uptoRs. 50,000/- interest income from bank FDs under section 80TTB
Cons
- Risk of losing capital, if not gauged the risk involved
- Inflation cost is not factored in so real return is less
3. National Pension Scheme
Pros
- Preferred investment option after PF for retirement planning
- Option to choose exposure in equity, debt and govt securities depending upon your risk appetite
- Reasonable return is guaranteed
- Income tax benefits upto Rs. 50,000/- are available under section 80CCD
Cons
- Not available for immediate withdrawal as Lock-in-period is longer
4. Investment in share market
Pros
- After PF and FD, a suggested product for people with high risk appetite
- Can be used as goal based investment for future commitments like higher studies, marriage, etc
- Don't go for direct equity investment if you don't know ABCD of investing in share market
- Lot of study and patience is must before direct equity investment
- Investment through mutual funds (lump sum or SIP) is most suited and less risky for majority of people
- Can go for direct investment plans with mutual fund companies to save agent commission but study well regarding fund size, fund manager, expense ratio, historical returns, risk involved, holdings, etc before going for direct investment plans
- Income tax benefits are available for ELSS funds under section 80C
Cons
- Risk of losing capital, if not gauged the risk involved
5. Real Estate:
Pros
- Investment with good long term returns
- A wealth creation tool
- Suited for high networth individuals
- Requires in-depth study of title documents and surrounding area development
- Investment in Commercial/Industrial property can fetch high returns
Cons
- Most illiquid asset
- Requires huge investment and long term commitment
- Legal disputed may arise if property documents are not clear
6. Gold
Pros
- A universal currency
- Solid long term investment
- Most liquid asset
Cons
- Requires huge investment
- Requires patience and long term commitment
Insurance
There are basically two types of insurance which are unavoidable.
1. Heath Insurance
The penetration level and awareness of health insurance is extremely low and is a matter of huge concern in India.
Have you ever thought that hospitalization for even few days can swallow all your savings if you are not having any health insurance?
Why
- To rest assured of decent medical treatment in case of any unforeseen health condition
- To not let any medical emergency ruin our lifelong savings
- Income tax benefit under section 80D is an add-on
How much
- Keeping in mind the hospital we choose under medical emergency, one should choose the coverage he can afford
- The quantum of coverage should increase with increase in age
For whom
- For all family members
- Choose family floaters but keep separate policy for old age people and people with serious health condition
When
- As early as you can afford
- The later you start, the costlier it becomes.
From whom
- You may choose any insurance company whether public sector or private keeping in mind the claim settlement ratio, coverage for all major illnesses, cash less treatment benefits, capping of room rent, pre & post hospitalization cover
- Don't just go for cheap plans, study well before you choose
2. Life Insurance (Term Plan)
The problem with India is that most of people consider life insurance as investment and a tool to save tax only. This is very wrong perception. Don't treat life insurance as investment. Therefore I request you to go for term insurance which is a better product with low cost.
Many people even after having a good lifestyle and high standard of living just ignore to get life insurance. Have you ever though what would happen to your family members in case you suddenly leave them without any funds or financial security?
Why
- A must have product for earning member of the family
- Not to leave our family in dire situations if we are no more
How much
- At least to let our family members carry current standard of living if an earning member is no more
- Add coverage with upgrade in standard of living, introduction of new family member, increment in earning members' income
For whom
- Must for earning member on whom the whole family is financially dependent
When
- As early as you can afford
- The later you start, the costlier it becomes.
From whom
- You may choose any insurance company whether public sector or privatekeeping in mind the claim settlement ratio,premium charges, coverage for longer period and flexibility of paying term.
- Don't just go for cheap plans, study well before you choose
In the end, I would request you not to ignore these two dosages of financial vaccination. They are necessary as they ensure your financial freedom and wellbeing. Investment will help you to generate a second source of income and facilitate wealth creation; While Insurance will be a big support in case of any unforeseen eventualities. Be optimistic but never ignorant.
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