The building blocks of a strong financial profile

Everyone wishes to provide well for themselves and their family. People work hard not only to earn a living but also to save something for that rainy day that lies ahead, to provide the best education for their kids and to lead that retired life in the future—to be spent in contentment without financial worries. However, how many of us actually take the necessary steps to achieve these objectives?

My observation is that for most people, providing for the future is achieved simply by investing their savings in certain instruments so that the money grows. Yes, savings need to be invested appropriately. However, while investing is important, it is only a small part of building a sound financial profile. There are other important elements associated with this process. This week, we shall see what these other essentials are and how they come together in building a strong financial edifice for you and your family.

Medical insurance
First comes medical insurance. This is a unavoidable expense, especially in a country like ours, where the state does not cover medical costs. Everyone should get a medical cover for themselves. Else, when an emergency strikes, apart from health consequences, repercussions on your finances could be disastrous. Of course, if you are salaried, more often than not, the employer arranges for medical insurance. Here too, most aren’t aware of the exact amount of coverage. Ideally, have a family floater policy for a minimum of Rs5 lakh. The premium for a family of four would be in the region of Rs8,000-8,500 per annum.

Life insurance
The basic financial tenet regarding insurance is that it is an expense and not an investment. Combining insurance with investment almost always leads to sub-optimal returns. Firstly, buy insurance only if your family needs it. Secondly, always, always, opt for a term insurance policy, which is the cheapest and purest form of insurance. A 30-year old can purchase a Rs10 lakh cover for a premium in the range of Rs3,500-Rs 4,000 per annum. If you find you have bought expensive insurance, consider surrendering the policy.

Public Provident Fund (PPF)
PPF is the best fixed-income investment that you can make. An annual contribution of Rs70,000 will get you Rs32 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.

Buying a house
There is never a good time to buy a house. The sooner you do it, the better. 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 option. The opportunity cost of the funds, if invested wisely, will almost always be higher than the interest rate on a home loan. 

Avoid credit cards
A credit card is the most dangerous enemy of a good savings habit. The reason is to do with human psychology. Whenever you spend money, there is a trade-off. Buying something gives you pleasure, whereas putting up cash for it is unpleasant. However, what if you could only retain the positive payoff without experiencing the negative emotion? Using a credit card allows you to do precisely this.

However, if you have to do something wrong, at least do it right. So use a credit card if you must, but don’t revolve the credit. India perhaps has the most expensive credit card rates in the world. A good habit is to pay off the amount spent on the card the next day without waiting for the due date. Better still, use a debit card or cash.

Equity
Making money in the equity market is easy, losing it is still easier. Don’t invest on tips and recommendations. Do your homework before buying a stock directly. A better option would be to use mutual funds. Choose a fund with a minimum track record of over three years. Don't time the market. 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. Don’t have more than three-month expense requirement at any time. Out of this, cash equivalent to a month’s expense could be kept in the savings account and the rest could be invested in a liquid fund.

Last but not the least, be persistent. The secret of success is constancy. It’s really not that difficult to achieve financial freedom. The only tough part is to keep doing the right things day in day out. If you do follow the above-mentioned principles diligently, you cannot lose. It’s really that simple.

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