Wishing a very happy Indian independence day to all the Indians and friends of India . As India celebrates its 69th independence day on 15th August 2015 you should also look towards marching towards a financial freedom. Here are ten steps to help you march towards it.
10 steps in your march towards financial freedom
1. Emergency Fund
Emergency can come knocking your door any time make sure you have at least 3 months of your expense parked as emergency fund. Liquidity is important hence in my opinion this is how you should park your emergency fund
- Keep one month of expense as cash as your home
- Keep one month of expense in your savings bank account
- Keep one month of expense in a liquid debt fund. This also helps you save income tax if the holding period is longer than 3 years. After all there is no guarantee that you will have to use your emergency fund in three years.
2. Life Insurance
- Life is uncertain you need money so that your dependents can lead a lifestyle that you were giving them with your income
- Experts advise that one should have a cover of 10 times your annual income.
- Make sure your dependents knows about your life cover and the claim process. Make sure you also introduce them to your financial advisor.
- You should also advise your dependents on how they can invest the money received from the claim to generate a regular income.
3. Health insurance
- Medical emergencies can cripple your finances.
- Ensure you have adequate medical insurance for you and your dependents.
- Aim to have a family floater plan that has no sub limits or cap on medical expense
4. Critical Care / Accidental Insurance Plan
- While life and medical insurance can take care of the respective needs there are times when you can be put on a bed rest leading to job loss
- Ensure you have a critical care plan that covers loss of income that may arise out of your inability to attend your income generating job
5. Insuring High Value assets
- If something happens to your high value assets like your home it will be difficult to manage your finances
- Ensure your high value assets like home, car, factory, shop are adequately ensured for theft, earthquake, fire, flood etc…
- In case of an equipment you should consider annual maintenance plans that cover spares and labour.
6. Appoint a financial advisor
- Unless you are an expert in personal finance domain you should look forward to appointing an advisor
- If you are a busy person and will not have enough time to track your investments regularly look forward to appointing an advisor who can track it for you.
- Interview advisors and pick one that can cover you on various aspects like advise on insurance, investments and income tax
7. Have a financial plan
- You should have a financial plan with all goals in mind.
- A financial goal should include inflation adjusted amount that you need for the goal and years that you need to invest to reach towards that goal.
- Few examples of goals are retirement, money for child education, money to buy your next car etc…
- If you cannot do it yourself ask your advisor to create a plan for you.
8. Choose the right investment plan
- There are multiple investment plans in the market choose the one that suits your goal
- Choose investing in an equity mutual fund if the goal is few years away. Equity mutual fund has time and again proven that investment for a longer time in a SIP has given best returns compared to other products
- Choose investing in a balanced fund or split your investments into equity and debt when investing in a medium term goal. Part of your money gets invested into equity that gives you better return and the other part is invested into debt products that are less risky.
- Choose investing in a debt plan like liquid funds, fixed deposits etc. when investing for a short duration goal. A market crash can erode your investment that you may not be able to recover in few months
9. Keep income tax in mind
- Invest wisely. You should be aware what are you saving for and how much time you would need.
- Understand tax implications of your investment.
- There are plans that help you save tax at the time of investing e.g. LIC of India policies, ELSS mutual funds etc…
- There are investments where you need to pay income tax even before maturity e.g. bank fixed deposits interest for each year is added to your income while the maturity is still further away
- There are plans that are tax free or nearly tax free at the time of maturity e.g. Mutual funds, LIC of India policies, Tax free bonds etc…
10. Buy a house / apartment
- You should consider buying a house/apartment for your own living. This one house will also be you retirement home post your income generating years.
- Did you know your retirement home can be reverse mortgaged to generate additional money for you after retirement? Reverse mortgage only applies to the house you live in after your retirement.
- Buying multiple houses is an investment strategy but buying one is a necessity. You should study the real estate market well before buying multiple houses.
Voluntary Disclosure : Author is an authorized agent of LIC of India , distributor of Mutual funds and authorized person on NSE.