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Financial Planning

Shyam is a 10 year old kid living in the rural part of Bihar. His father is a daily wage labourer and mother works in a local mill. Shyam has a younger sister, she is 7 years old. He puts his coins and notes at regular intervals from various sources in his piggy bank. This is the basic level of Financial Planning Shyam is doing. We hope everyone of you has done the same in your childhood. 

Go back to your memory lane and feel the sense of savings you used to do. 

Ask yourself:-

  • How do your Family members practice Financial Planning?

  • What are the modes of saving? 

  • What are the sources of funds in case of a medical & financial emergency? 

What is financial planning?

A financial plan creates a roadmap for your money and helps you achieve your goals. Financial planning can be done on your own or with a professional. Good financial planning should include details about your cash flow, savings, debt, investments, insurance and any other elements of your financial life.

As a youth it is very important for you to save today so that your tomorrow is secured. 

Few Good habits to develop early:

You have always heard these famous equations, 

Income – Spending = Saving  BUT try to follow a more sensible approach of

Income – Saving = Spending. 

This simply means that first you allocate your savings and then spend what is left (after basic requirements of Rent, Food, Bills etc. )

Understand this with a following example: 

  • A 23-year old who puts away Rs 6,000 a year for 10 years at an annual return of 8%, will have around Rs 87,000. If after those 10 years, he stops contributing and does nothing else till he is 60 years old, the portfolio will have grown to around Rs 694,000.

  • The person who waits until he is 33 to begin investing will need to invest Rs 7,950 for 27 years (till he reaches 60 years of age) in order to have around Rs 694,000.

  • In total, the 23-year old had invested Rs 60,000 out of pocket (to reach Rs 694,000 at age 60) versus Rs 215,000 for the 33-year old.

  • As these calculations show me, there are great costs of starting late on the saving and investing path.

  • So you  must start early.  Are you going to save this month?

Process of Financial Planning:

  1. Knowing the current Financial Situation

  2. Developing Financial Goal

  3. Identifying Alternatives

  4. Evaluating Alternatives

  5. Creating a financial plan

  6. Implementing the financial plan

  7. Revising the financial plan

Emergency Fund:

Always have an emergency fund. This fund must be 6 to 8 times your monthly expenses. 

Make sure that you never use these emergency funds to get gadgets and other luxuries. 

Consider it as sacred money and use it only during emergencies. 

With the outbreak of covid -19, the value of the emergency fund has been validated. Future is uncertain and during tough times of lockdown, being jobless or any medical emergency. These funds are your only saviour.   

Insurance

Why Is Insurance Important?

Buying insurance ensures that you are financially secure to face any type of problem in life, and this is why insurance is a very important part of financial planning. A general insurance company offers insurance policies to secure health, travel, motor vehicle, and home. The convenient part of it is that you can purchase all these insurance policies online nowadays. Few insurance depends on the person’s choice (Term, health) few are compulsory (Motor insurance). 

What is Premium?

Premium is nothing but an amount to be paid on a regular basis for a contract of insurance.

Premiums can be either Monthly, Quarterly, Half-yearly or Annual.   

Here are the Main Reasons Why Having Insurance is Necessary: –

1. Financially Security

No matter how much you are earning or how much you have saved; your financial position can be dented by an unexpected event in a moment. So, the best way to become financially secure is to cover yourself, your family, and your assets with insurance. You can buy or renew insurance online and receive a payout for financial support, in case there happens to be an unforeseen event.

2. Transfer of Risk

The contract of insurance works on the ‘principle of transfer of financial risk from the insured to the insurer’. As an insured, you pay premiums to receive compensation from the insurer, in case of occurrence of an unforeseen event. So, having insurance reduces the financial burden on your shoulders.

3. Complete Protection for You and Your Family

Family is the most important asset that you have and your family also depends on you for financial support. This is why it is important to make sure that you and your family are completely secure to face any emergency.

4. No More Stress or Tension During Difficult Times

None of us can see the future or predetermine the future events. Any unforeseen tragedy can leave you physically, mentally, and financially strained. So, if you have insurance to take care of the outcomes of such tragedies such as illness, injury or permanent disability, even death- you save yourself and your family from tension and stress. With insurance in place, any financial stress will be taken care of, and you can focus on your recovery.

5. Some Types of Insurances are Compulsory

Insurance is necessary because sometimes it is mandatory as per the law. An example of this is motor insurance. As per the Motor Vehicle Act of 1988, it is compulsory to have at least a third-party motor insurance for every motor vehicle plying on road in India. Motor insurances come in really handy during claims. At IFFCO Tokio, we have improved it even further with our Quick Claim Settlement process which, as the name suggests, expedites the settlement of claims.

6. Peace of Mind

Having insurance offers you financial security and also peace of mind. No amount of money can replace your peace of mind. So, when you have insurance you know that you are secured against any unforeseen events in life, and this gives you complete peace of mind.

The sum of all these reasons provides enough reason as to why insurance is necessary. and with the convenience that you have to buy insurance online from a general insurance company like IFFCO Tokyo to secure you, your family, and your assets, both financial freedom, as well as peace of mind, are pretty achievable.

Types of insurance you must have: 

Health is Wealth: 

One of the biggest aspects of financial planning also revolves around health. It is rightly said Health is something which no one can buy. BUT we can definitely secure ourselves with the unforeseen situation in future which everyone has to encounter. Even if your employer is providing you with health insurance for you & your family. You must also look for independent health insurance as your association with the company may not be life long.

Term Insurance

This is the most purest & cheapest form of insurance yet not subscribed by many people. The only reason being that the money is gone if you survive the insurance period. But you must also understand that this type of insurance will be a saviour for your family. 

For E.g. A sum of Rs. 50 lac term insurance can be easily purchased with a premium of less than Rs. 10,000 per year which accounts for almost Rs. 800 per month which is not a burden to the pocket. 

Mutual Fund: 

Mutual fund is a process where investment is taken from various investors and the pool of money generated is then invested to purchase stocks, securities & bonds. It is considered one of the safest forms of investment as the money collected is handled by professional investment bankers. This reduces the risk and also the risk (if any) is distributed among various investors.  

SIP:

SIP stands for systematic investment plan. It is the most widely followed investment plan by youths and college students. In this plan you invest a small amount in a mutual fund scheme. One of the safest and most convenient forms of investment. The SIP starts from as low as Rs. 500 per month. 

PPF Scheme: 

PPF account is a long term investment plan. It has an attractive rate of interest (non-taxable). To avail the benefits one has to open the PPF account and the amount deposited annually will be claimed under section (80 C). {refer income tax handout}

Where to open a PPF account?

You can open the account at the Post Office or any other nationalized bank. 

Interest Rate: The present interest rate as of 2021 is 7.1% compounded annually. 

The minimum time period of a PPF is 15 years. You can extend the period in blocks of 5 years as per your wish. You can open an account with a deposit of Rs. 500 and this has an upper capping of Rs. 1.5 lac. 

Eligibility: Every Indian can have a PPF account. They can have only 1 PPF account, they can have a second account only in the case of minors.

Withdrawal: As per the rules one can withdraw the PPF account only at the time of maturity i.e. 15 years. However the scheme also permits partial withdrawal anytime after completing 6 years. 

Worksheet

Let’s Reflect!

  1. . How do you think today’s class will help you attain financial freedom? List action points which you take for your financial freedom?

  1. . What challenges will you face while building your Financial freedom?

  1. . How much of an emergency fund will be sufficient for you? Why?

Quiz:

1) Which of the following does not come under Financial Planning?

a) Budgeting

b) Capital Generation

c) Funding

d) Entrepreneurship

2) What is a Debt?

a) A sum of money which is due

b) A depressed money

c) Money in your account

d) Money earned through interest.

3) What is Insurance?

a) Money given to the bank.

b) Compensation against damage or loss.

c) Money earned by the stock market.

d) Money given to cooperative banks.

4) Which of the following is a benefit of Insurance?

a) Investment

b) Financial Security

c) Loss

d) Financial Market

5) Which of the following is compulsory Insurance for everyone?

a) Term Insurance

b) Travel Insurance

c) Property Insurance

d) Motor Insurance