Financial planning in India is still in its nascent stage. People are not ready to pay for the advice. Everyone is looking out for free financial planning advice either online or offline, through Facebook groups, Google groups and/or through friends. Reasons for doing so are numerous which may include:
- High fee for financial planning
- Lack of awareness
- Lack of trust
This article is for those people who do not want to pay for financial planning but would rather want to do it themselves. What should I do when I want to do my own free financial planning in India?
These are generalised advice; for your own financial planning, you need to customise it, as you are the only person who knows your assets and liabilities.
Free Financial Planning Advice Tools
Free financial planning advice tools, in India, have been divided into 3 parts:
- Family security and expense reduction
- Investment avenues and ways
Family Security and Expense Reduction
The first thing you need to do is buy a Term Insurance Policy. You can buy it online as well as offline. Online Term Policy premiums are cheaper since it does not include agent’s commission. You can also check the Claim Settlement ratios of the insurance companies to choose your insurance provider.
How do I calculate the right insurance coverage?
It’s not easy to calculate the amount of cover you require but in simple calculation the Term cover should be approximately 15-20 times of your annual CTC. If you have any additional liabilities like home loan, personal loan etc., add the amount to your insurance cover.
For example, if your annual CTC is Rs. 6 Lacs, go for a cover of approx. Rs. 1 Cr. In addition, if you have taken a home loan of Rs. 30 Lacs, add this Rs. 30 Lacs in your Rs. 1 Cr. amount, so the total cover is Rs. 1.30 Cr.
Insurance and Investment
Do not buy insurance for your investment purpose. People buy insurance to save taxes, but there are other avenues for tax savings like ELSS Mutual Funds, PPF, etc.
If you are still hell-bent on buying insurance, go for ULIPs but pay it for the long term. Endowment, Money Back policies, and Child policies is a complete no-no.
Buy a Health Insurance Cover
Even if you are covered by your employer, buy a cover for your family. There can be situations where you are not covered by your employer. Let me give you an example:
Suppose for your career growth, you are changing your job and you have taken a break for 10-15 days before joining the new company. In between, if you are hospitalised, who will cover for your expenses?
Most of the private companies do not cover you after your retirement and the premium of health insurance is very high at an old age and it may not be possible to buy a new policy at that time due to health conditions.
What happens when there is a recession and you lose your job?
Switch your Home Loan to low-interest rates
People who are paying interest rates of more than 10.15% should consider switching their home loans to other banks.
In case you are not aware, banks always have margin money for their profitability. Suppose, the base rate of RBI is 10% and the bank is giving you loan @10.75%, the profitability of bank is 0.75%.
Speak to your bank’s representatives to see if the interest on your home loan can be reduced. There is a small amount of transaction fee involved in it but in the long run, you will save a lot of money.
If your bank is not ready to reduce it, switch it to some other bank.
Make a Budget
This helps you to narrow down on your expenses, see where your expenditure is high. This way you can streamline your expenses and can reduce them in the long run.
Example: Paying bills on time, using public transport, shopping during sale period, budgeting your grocery needs
Investment Avenues and Ways
You need to answer this question before we move ahead – What sort of an investor are you?
Investing = Income – Expenses
Income – Investing = Expenses
If you are investing after spending, then you are not a disciplined investor. Most probably, you have not decided your goal. You need to sit, prioritise your goals and start investing.
If you are investing before spending, you seem to be a disciplined investor. There are chances that you may also not have prioritised your goals.
So, what are the investment avenues for you also depends upon whether you are a:
- High-risk taker
- Moderate risk taker
- Low-risk taker
It also depends on the time period for which you want to invest.
- For short-term goals (up to 1 year) like paying off a personal loan, sending kids to school and so on – Auto Sweep Facility, Fixed Deposits etc. are better avenues.
- Medium-term goals (up to 5 years) like buying a car, down payment for your home, going for a vacation etc. – the investment avenues are Recurring Deposits, Debt Mutual Funds etc.
- For long-term goals (10-15 years) like children’s education, marriage, retirement etc., Mutual Funds, PPF, and other debt avenues are better choices.
For tax savings purpose, you can also invest in ELSS Mutual Funds.
How much amount is required for your short, medium and long-term goals is a big question? You need to calculate each goal in their current value and then add inflation rate to it.
With most of the people working in private sectors, there are no pension benefits available. Our EPFs also get consumed in most of the cases when we switch jobs. How should we save for our retirement so that we are able to lead a decent lifestyle without being dependent on our children?
Let us assume my current age is 35, I want to retire at 55 and my life expectancy is 75 years and investment returns after retirement is 2%.
Expenses after retirement per month = Rs. 30,000 (according to current value)
Value of Rs. 30,000 after 20 years (assuming 6% inflation) = Rs. 96,000
You will require Rs. 1.9 Cr. at the time of retirement to ensure the same standard of living.
To accumulate this amount, you need to start investing Rs. 20,000 per month if your investment returns are 12% CAGR.
Now your asset allocation at the age of 35 can be 100% equity but it needs to be changed over a period of time and at the time of retirement, ideally, 80-100% allocation should be towards the debt instruments.
There are some other ways also:
- Look out for some robo advisory services for free financial planning advice
- Attend some local events done by financial planners
- Check out with your agent, some of them are really good, while the others will suggest you the product in which they get the highest commission
- Read some good personal finance blogs and do it yourself
Financial Planning Excel Tools with Worksheets
There are many formulas or tools in excel which you can use to do your free financial planning like present value, future value, IRR, XIRR etc.
If you want a complete excel tool with worksheets of insurance, investment, retirement etc. you can download by following the link
These are very few basic free financial planning advice. If you can do it yourself, please go ahead. If you do not want to pay for financial planning, you will always come across some insurance adviser who will come and get his commission by selling you a product.
The choice is all yours – free financial planning advice, fee-based financial planning or commission to advisers!