Column

At the outset, let me be honest. Every year, towards the end, I repeat this particular column. And the reason for this is that I feel the principles laid out herein are so vital for one’s financial health that they justify the annual repetition.

The basic premise behind these financial principles is that the simpler you keep it, the better your chances of making money. Markets by their very nature will react to domestic, international, political, geo-political and economic events. However, the fact is that nothing is permanent; you shouldn’t take anything for granted. Which in turn means that even the current tumultuous environment is transient, this cycle too will change. Though each individual’s life situation is different, the following principles of financial planning are universally applicable.

Medical insurance
This is a non-compromisable expense, especially in a country like ours where the state does not cover medical costs. Everyone, young or old, male or female, salaried or a business person, without exception should have a medical cover. Ideally, have a family floater policy for a minimum amount of Rs 5 lakh. The premium for a family of four comprising husband, wife and two kids would be in the region of Rs 8,000-8,500 per annum.

Life insurance
First, buy insurance only if your family needs it. Secondly, always opt for a term insurance policy which is the cheapest and the purest form of insurance. A 30-year old can purchase a Rs 10 lakh cover for a premium of Rs 3,500-4,000 per annum.

Buy a house
There is never a good time to buy a house. The sooner you do it, the better it will be. With supply being limited and a billion people and counting, housing in India is never going to be cheap. Opt for housing finance, even if you have your own funds. Home loans are the cheapest loans on offer. The opportunity cost of the funds if wisely invested will almost always be higher than the interest rate on the home loan.

Public Provident Fund (PPF)
PPF is the best fixed income investment that you can make. An annual contribution of Rs 70,000 will get you around Rs 32 lakh in 20 years. Look at it as a fund for the education needs of your children. If you are married, get your spouse to invest too and you would have a retirement fund ready.

Avoid credit cards
Use them card if you must, but under no circumstances revolve the credit. A good habit is to pay off the amount spent on the card the very next day without waiting for the payment due date.

Equity
By now, all of us would know only too well that making money in the equity market is easy, losing it is easier. However, always know what you buy and buy what you know. If you invest on tips and recommendations, you are literally kissing your money goodbye. If you buy a stock directly, it has to be something that you have done your homework on. A better overall policy would be to use mutual funds. Don’t time the market. It’s never worked, it never will. Just invest for the long-term.

Emergency fund

Money lying idle in the bank is all too common. At the same time, investing the last penny that you have is also not desirable. Have no more than three month expense requirement available at any time. Out of this, cash equivalent to a month’s expense could be kept in the savings account and the rest invested in a money market scheme.

Last but not the least, be persistent. The secret of success is constancy to purpose. It’s really not that difficult to achieve financial freedom. The tough part is to keep doing the right things day in day out, month in month out, year in year out. But trust me, if you do follow the abovementioned principles diligently, success is yours. And lastly, do remember that all the so-called “secrets of success” will not work unless you do.

The writer is director, Wonderland Consultants, a tax and financial planning
firm. He may be contacted at sandeep.shanbhag@gmail.com