Sunday, June 12, 2016

Over a casual phone conversation with my friend i asked "How much money do you need to live?" the answer really shocked me on lack of financial awareness amongst young earners.

Financial planning priority pyramid
To make the illustration simple i'll try to put myself into the shoes of average Indian.

Most of us think we need 25K or 50K or 1 lakh INR per month salary to live a happy life. If you are thinking that 25K INR is enough for now at the age of 25 then i fear you are in a very risky situation.
Mind voice: What do you mean my risky situation?
Me: It's simple, you will find it difficult to get financial freedom or early retirement.
Mind voice: Come'on you are talking about retirement to a 25yr old guy? Seems like theory class.
Me: Oops! need data to prove them the seriousness, okay read the below examples.

Lets consider 25K INR scenario (Risky):
A fresher from engineering college, it's very obvious he/she will be single or in relationship, rarely married. Mostly sharing house/room with friends and likely to pay education loans, have a bike and moved to a metro city. It's very clear that 25K on hand is a lot of money and may be he/she will spend it every month and wait for the next month salary to hit the account and it continues.

What is really required is not just spending to make up the living but also start thinking about saving and investing. If i ever had a change of rewriting my history using a time machine i would start investing first before spending from the first pay check onwards.

Consider 50K INR scenario:
I would say if a guy says he needs 50K INR per month salary, considering the inflation of India at 7% he/she would need atleast 10 Cr INR when you are 60 to keep up his lifestyle after retirement. Also we all know it's God's decides how long we may live on this mother earth but we make commitments and create dependants, so caring and planning for them is foremost moral responsibility for us. Considering this we will need atleast 2 Cr INR insurance. We all love to work for private companies because of the culture and freedom, but we all are aware of the fact our job guarantee is only 90 days, so setting up a emergency fund which will help us pay our EMI's on time for atleast 3 months is most important. Hence, 50K*3 = 1.50 Lakhs INR needed as emergency fund. Considering the number of diseases exist today and improper food, sleeping and fitness schedule we don't have a choice other than taking up a medical insurance of atleast 15L for self and another 25L for parents who are ageing.

Apart from the above mandatory financial planning we also have our life events like marriage, children, education, world tour, short vacations and family responsibilities. Also some of the emotional asset creation like buying a house, owning a car etc.

Food for thought:
So the underlying fact is 25 to 35 is the best age to make sure you get you retirement planning done by a simple rule of investing. Can it be investing on FB, PPF, NPS, ULIP, Mutual Funds, Gold or stocks? and also How is it possible to finish retirement planning before 35? Every one will get these questions.

The answer i'm aware of is just with help of a servant who works for you tirelessly forever. Then who is that servant? His name is "power of compounding".
Mind voice: You are using jargons, can you make it simple english?
Me: Oh, okay let me try.
Key take away:
The purpose of life is living, that too peaceful living. I promise it's really simple don't work hard, just work smart. Make money work for you.

Sample action plan
If it's for my sister or brother i would suggest the following approach
- Settle down all the present debts and loans ASAP, do not skip or miss any EMI's it will affect the CIBIL score which may be a huddle to get any further loans when needed.
- Set aside 10K every month and invest in Mutual funds which give atleast 14% returns from 25yrs to 35yrs and leave it till 60yrs. (As i said it would give you more than 10Cr INR and later you could deposit this to get steady monthly income after retirement) So you won't disturb your son/daughter plan their retirement ;) visit
- Set aside 10K per year to take a term insurance worth 2Cr INR when you are early say 25yrs old. It would cost you less and it's a fixed cost which will not increase due to inflation. Even in that try to opt for a assured sum + monthly income increasing schemes. There are few who provide very good protection at a nominal cost. (As I said, now your family is protected when if something unexpected happen to you, so you still keep up your promise you made when you took her hand from her father) visit
- Set aside 15K per year to buy a health and accident insurance of 15 Lakhs INR for you and also another 20K per year to buy insurance of 25L INR for your parents.
- Now skip buying that costly iPhone, upgrading your gadgets and skip few weekend parties to accumulate your 3 months salary so that you can yell at your stupid manager and put down your papers if the job is nor interesting.
- Prioritise your next goal in life, let it be getting married or buying a car or moving into a good house etc. Start saving to reach that nearest goal.
- What ever is left remaining after this is what you have for spending (I knew it's neglect-able), if you feel so then your next step should be explore and work for a company who is ready to afford you at your expected CTC which will help you free from financial burden.

This is where most us and our friends go wrong, we would start working for a company who under pay an engineer and because of that the fresher is never able to take risk in his life. Global companies and western counties do this math and set the minimum wage for each sector and skill, but Indian government still not ready for it.

So, to put it simple early investing habit is a smarter decision and the only way to fight against the inflation is invest in compounding assets.

Disclaimer: I'm not a certified financial advisor and all the above are only an examples. Please consult a certified financial advisor to check the proposed approach.


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