You are just beginning to realize that you would like to be better at managing your money. You have been working for a few years and feel like a zombie with your salary – it comes, you spend, it goes and next month the same cycle is repeated without your being able to put a constructive thought process behind it. You want to know more, but all those fat stern-looking data-heavy books don’t really look inviting. What you would really like is if someone could tell you the basic building blocks of this much touted recently trendy term “financial planning”.

That in short was a dilemma posed to me by a dear friend yesterday. What she really asked me for was a book that gave her a brief yet sufficient idea about financial planning for a 30-year old without putting her to sleep. While I have read enough and more books about the subject, I wasn’t sure there was one book I could recommend to her to really fulfill her requirement. I thought some more and realized if the main objective behind Elementum Money is simplification and nudging people to think about their money, this is right up my alley.

WHY FINANCIAL PLANNING?

They all say spend less than you earn. But is that really enough? Unless there is an objective in sight, how do you know what you are progressing towards.

Financial planning is essentially the process of streamlining the process of earning, planning, investing and even spending your money.

I don’t know about you, but I have never made a long-distance trip for more than a few days, without amply planning for it, in minute detail – be it air tickets, internal travel, accommodation, sightseeing, food and even entertainment.

THE A-B-C OF FINANCIAL PLANNING

Any book on personal finance will enrich your knowledge

Google “best financial planning books” and you will get almost 20 million results. Everybody has an opinion on what has been the most enriching value-adding personal finance or financial planning book for them. Personally, having read multiple books like “Rich dad poor dad”, “Richest Man in Babylon”, “The Intelligent Investor” I can say that each book has added to my understanding. Distilling through the knowledge gathered from those books and of course studying for the Certified Financial Planner examination, there are 3 major aspects to any solid financial plan – emergency fund, protection/insurance and goal-based investing. This, of course does not take into account any unpaid debt that you might be paying.

PROTECTION/INSURANCE

If you have dependents, loved ones whose standard of life might fall in case of your demise, life insurance is a must. Read about why you need to get life insurance, some common myths about it which you must not fall for and how to calculate your appropriate amount of life insurance policy.

Considering the escalating cost of medical care in India, health insurance is equally important today. In fact, this makes sense even in case of no financial dependents. Only recently I found out that maternity costs are in fact not covered by most office health insurance covers (group mediclaim). While my office gives a Rs. 50,000 bonus to women undergoing a delivery, in most big cities that would not cover even half the expenses.  It might be a good idea to read that office mediclaim policy (which a lot of us depend on for medical costs) and understand what all it covers and what it doesn’t. As with any office facility, let it not become a reason to trap you to a job and an agnostic service for something as critical as a life or a health insurance is always better, even if it comes at a slight cost.

EMERGENCY FUND

An emergency fund is a stash of money that should be used in case of its’ namesake – emergencies. The idea is that in case you are not able to earn for a 3-6 month period, you should be able to take care of mandatory expenses, for you and your loved ones. In some ways, it’s an alive insurance – you are alive but insuring yourself against unforeseen unfavourable circumstances.

GOAL-BASED INVESTING

Goal based investing gives an objective and a sense of direction to your money

Ah, the financial planning celebrity. For a lot of people financial planning is synonymous with goal-based investing and to a lot of people, this is the most confusing and off-putting part. So, I will try and break it down here.

We all have dreams in our lives, most of which require to be funded with money (apart from blood, sweat and tears 🙂 ). Being able to list those financial dreams and their cost will go a long way in motivating you towards making your money work hard and also in you actually being able to achieve it. What do I mean? Well, if you knew you are putting in Rs. 5000 every month for that holiday that you day-dream about through those long exhausting days at work, your probability of continuing with that investment is going to be much higher than if you were simply investing money into a blackhole with no sight of how it will be used.

When you list down your financial goals, make sure saving for retirement is one of them. I can’t stress enough how many of us have not even started on it and also just how important it is. That, however is fodder for another post which is brewing in my head and shall be put on the blog soon enough.

These 3 steps form the bedrock foundation for financial planning. The quantum might change with age and circumstances (like a bigger health insurance policy over the years) but these will hold you in good stead through most of your financial journey.

You can always make a fancy structure on this solid foundation with other elements like a screw-it fund (a fund which makes you feel nothing will trap you), a discretionary spend fund (money you save to spend guilt-free), insuring other assets in your life or planning how to reduce your debt liabilities – the possibilities are endless.

Have an opinion? Feel I missed out on anything? Or want to know more about anything mentioned above, do feel free to comment or email me at aparna@elementummoney.com