All About Life

How Not to Break the Super Power of Compounding

The Importance of Financial Planning

Thoughtful Financial Planning can easily take backseat to Daily Life – Suze Orman

We have all seen what super power of compounding is and the Power its possess.

Believe me, those who have managed to get the best out of this eighth wonder of the wonder are a rare breed.

Notwithstanding, I am more concerned about you, the one reading this blog.

Having said that, do you really think you are endowed with the virtue of making the best use of Compounding?

If you do, I already am your big fan.

Even if you don’t, the good news is that the temperament required to make full use of this super power can be developed.

The biggest deterrent is when one stops Investing or when the invested corpus is withdrawn too soon.

This usually happens because of lack of or no Financial Planning.

Before going to the depths of it, let me give you some insights on the mindset that we Indians carry towards Financial Planning.

The Indian Mentality Towards Financial Planning

‘If you take control of your finances today, then you won’t be a victim of them tomorrow.’ – Emily G. Stroud

The only roadblock on your path to a secure future is if you don’t have a Financial Plan in place.

The psyche that the masses carry is that Insurance (which forms a bedrock in Financial planning) is considered to be an expense rather than perceiving it as a safety net.

Only when a large medical expense hits one or a sudden demise of a loved one who also happens to be the sole earning member, does one realize the importance of an Insurance cover.

The premium is only a small payment one makes to provide a safe guard to the family in case of an eventuality which sadly one fails to fathom.

Be that as it may, let me take you through some of the roadblocks that you might encounter.

Emergency Fund

‘It may take you months or even a few years to build up an adequate emergency savings fund. That’s okay. – Suze Orman

Never in our wildest dreams did we imagine that the way we live our lives would see a tectonic shift with a bat of any eye.

Millions lost their livelihood when the Pandemic stuck after a gap of 100 years.

The sad part is, hardly anyone was prepared.

And the hardship that some went through was incomprehensible.

Imagine this, the expenses that one incurs on a day today basis shall never cease. So, we better be prepared.

‘Failing to Plan is Planning to fail’ – Alan Lakein

Ever wondered what could have helped us in such dire straits?

Well!!!! Moolahs are not going to drop from the sky into our lap. We only have to help ourselves.

The simple answer is to create a safety net in the form of an Emergency Fund.

In simplest of terms, Emergency Fund is a Corpus that one falls back on in times of unanticipated crisis. This could also be in the form of unforeseen medical exigencies, Home Repairs, Automobile breakdown and alike.

As a thumb rule, one must have at least 3 to 6 months of Salaried income as an Emergency Fund.

Where to Park the Emergency Fund

NEVER INVEST THE EMERGENCY FUND IN STOCK MARKET.

This should ideally be parked in a Liquid Mutual Fund which gives a return of approx. 6% and they park the money in to Debt based securities. The invested corpus can also be withdrawn in no time and can be used for day to day expenses in case of any hapless situation.

Leaving the Emergency Fund in the Savings Bank Account is also not advisable since the returns are a meagre 2.5%. – 3%

One might fancy withdrawing the amount for the purpose of purchasing a high end gadget or going on an exotic vacation. This is when the entire purpose of creating an emergency fund gets defeated.

NEVER ASSUME THAT LIFE WILL BE SMOOTH. IT HAS ITS OWN WAY OF TEACHING US HARD LESSONS. Rather, be prepared.

Health Insurance

‘Health Insurance is not about the weight you lose but about the life you gain.’

In simple terms, Health Insurance covers hospitalization treatment costs in case of any unfortunate accident or injury.

Health Insurance forms the second pillar of Financial planning and the lamentable part is that only about 37% of Indians are covered in any form of Health Insurance.

The cost of treatment for any major illness can easily go in Lacs to say the least.

Moreover, the medical inflation which invariably falls in the double digit keeps breathing down one’s neck and the treatment cost goes up year after year.

Imagine the predicament if someone contracts an Illness or meets with an accident.

This is like a double whammy when along with the mental trauma, an Individual might face a Financial crisis should he(s) be uninsured.

It is a no brainer that Health Insurance is quintessential and forms the bedrock of Financial Planning.

Having said that, the next question that needs to be addressed is, how much Health Insurance cover should one ideally have?

Ideally speaking, Health Insurance cover that one must have is equivalent to the cost of treatment of a serious health ailment that cost approx.. 4-5 Lacs.

Life Insurance

‘Life Insurance offers a man the only way where he can make his will before he makes his money’ – Unknown

In the FY-20, the penetration (Premium percentage as the percentage of GDP) of Life Insurance stood at 2.82% below the global average of 3.35%.

As I write this, more than a hundred Crore Indians do not carry any Life Insurance cover. These figures are shocking to say the least.

One cannot imagine the predicament of a family that loses a loved one who also happens to be the sole bread earner.

While one would agree that there is no replacement of a loved family member, however, at least the Family would be Financially safeguarded in case of any eventuality.

Furthermore, there are other benefits of having a Life insurance cover as listed under.

  1. Brings peace of mind and an assurance that even if we are not there, the financial needs of our Family members would be met.
  2. Assures financial backing for the best possible future for our children.
  3. All the Loans/debt liabilities can be paid using the Insurance proceeds.
  4. The entire amount paid as premium offers Tax benefit.

All the aforementioned points would help one be financially sound secure.

Remember, Financial Planning begins with creating an Emergency Fund followed by purchasing Health and Life Insurance cover in that order.

Let’s begin.

Now!!!!

Here is wishing you the best financial future ahead.

Also Read: Super Power of Compounding

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