A Free Financial Plan
MAS Team | 12 November 2014

Most savers are all confused about how to plan their finances. It is not their fault. There are too many products to choose from, each with its own merits and demerits. Then there is wisdom coming from the media and financial experts, which is often self-serving or contradictory. Financial Planners seem to charge a lot for so little. So most of us do what comes easy to us – practically do nothing and do what is easy.

We earn, we spend on household expenses, pay our loan instalments and our savings accumulate in the bank. Sometimes we move your money into a fixed deposit. And then create another one. We accumulate fixed deposits of different maturities, unmindful that the principal is losing money thanks to inflation.

Sometimes attracted by a rising stock market, we start a Systematic Investment Plan in equity funds. If the market goes down sharply, disheartened with how the investment has behaved, we stop SIPing. In February and March under the guidance of a friend, an agent or a relationship manager, we buy some more life insurance to save tax. For the privileged few, the employer offers a health insurance plan. But it may not cover our parents. And then, in a quiet weekend, we reflect whether your finances are in a mess. We worry.

But it need not be this way. You can plan your finances quite easily. Safe and smart financial planning is really easy if you follow some basic principles.

Here are the six steps you need to follow:

Step1: Find out your tax-bracket

If you are in the 20%+ tax bracket, saving on taxes is critical. Invest Rs1.5 lakh in Employee Provident Fund (EPF) or Public Provident Fund (PPF) account. Remember to count this as an investment in debt.

Step2: Buy An Online Term Plan

If you have dependents, buy an online term plan. Buy the maximum amount you can get. It would be at least 10-15 times your salary.

Step3: Ensure 25% of income is saved

We earn, we spend on monthly expenses and we have financial outgoes such as insurance premium and loan repayments or tax saving investments. What is left after all outgoes is your monthly savings. Make sure it is 25% of your income. Remember, all your major future expenses such as children's education, marriage expenses or retirement corpus will come from this savings, carefully invested. Also, pay off loans, except housing loans. Housing loans offer up to Rs250,000 in tax benefits as interest and principal.

Step4: Divide this savings into the right investments

There are six primary products you can invest in: Fixed Income (Bank FDs, Bond Funds, Provident Fund, etc.), Gold, Real Estate, Insurance, Stocks/Equity Mutual Funds. Investing your savings in the right proportion across stocks/equity mutual funds and fixed income products will work well for all specific goals for over five years such as children's education, marriage expenses or retirement corpus. Too much of investment in bank FDs are bad, as we have shown here. But they give steady returns. Equity mutual funds are volatile but give higher returns.

Choosing even a simple 50:50 or 60:40 mix will work fine for the long term. Finance professionals like to make this (dividing your savings into different products) sound very technical, calling it "asset allocation". Wealth managers make "asset allocation" a complex process, adding various other investment products. Avoid such complexity; it doesn't fetch much by way of additional post-tax returns.

Step5: Buy a hefty comprehensive Personal Accident policy

Make sure it offers lifelong renewal and covers comprehensive disability (permanent total disability, permanent partial disability, temporary total disability

Step6: Buy a health insurance

If what you don't have one or if the one offered by your employer is not enough, buy a health insurance. If you have a family, preferably buy a family floater.

That's all you would need as a basic financial plan which will take care of almost all your needs. Believe us, almost 80% of the savers are not following all these simple five steps. Don't be one of them. We have created a free tool that puts together what is mentioned in this article  


There could be one problem, though, in following the above. You may need help in selecting the right term plan, the right health insurance, the right personal accident plan and the right equity funds. You also need some idea of timing your equity funds investment, because if you can buy more when the market is down and less when the market is up, you make far better returns.

For that extra help, may we suggest Moneylife Smart Savers, backed by thousands of manhours of high quality ethical and actionable information and research? We don't sell any financial products which helps us offer you a no-bias, no-conflict platform. Premium members get 11 Great Benefits that cover 90% of their financial needs.