How to Ensure Your Savings Survive
Being careful with money is about more than just making ends meet. You don’t have to be a math genius to work this out, there are quite a few online tools available to help you out with this.
Life is much simpler when you have good financial skills or at least basic knowledge about how to manage finances. How you spend your money affects your credit score and the number of loans you may end up carrying. If you’re struggling with money management for example unable to save in spite of earning more than enough then you must read through these tips to improve your financial habits.
How to manage Your Savings for long-term
Track Your Spending & Have a Budget
Many people don’t account because they don’t want to go through what they believe will be a slow process of recording out expenses, adding up numbers, and making sure everything lines up. Even though it sounds boring tracking expenses is the first step to understanding your financial habits, the next step is the put up a limit for such expenses i.e. budgeting. Tracking and budgeting will take just a couple of hours every month, and believe me; it will save a lot of trouble in the future. For many expense tracking is an eye-opener, they realize the unnecessary expenses were happening and that immediately improves the savings, this coupled with budgeting thereafter ensures the first baby steps to better money management. This process may sound boring but rather than concentrating on the method of creating a budget, focus on the value that budgeting will bring to your life. You can also use mobile apps like Walnut to track your expense on a regular basis.
Frame Your Financial Goals
You have begun saving, but will you have enough to buy a house ten years down the road or even a car five years from now? People manage to save aggressively and invest with extreme vigour but do so blindly, jeopardizing their purposes. It is crucial, rather than saving aimlessly, the aim should be to bring in the discipline by saving and investing with the proper financial goals in mind. Many people of different age groups save well but fail to link it to financial goals. After budgeting well, the next step in money management is framing your financial goals. Here you should take the help of professional financial advisors as they may help you plan your financial goals by suggesting suitable financial products.
Don’t Take On Any New Recurring Monthly outgos
Just because your revenue and credit qualify you for a specific loan, doesn’t mean you should take it. Many people naively think the bank wouldn’t recommend them for a credit card or loan they can’t manage. The bank just looks at your income, as you’ve reported, and the debt burdens included on your credit report, not any other promises that could stop you from making your payments on time. You really have to evaluate where the monthly payment is affordable based on your monthly income and existing outflows.
Save Up for Big Purchases
The ability to delay satisfaction will go a long way in helping you manage your money better. When you put off significant investments, rather than cutting on essentials or putting the investment on a credit card, you give yourself time to estimate whether the investment is necessary and even more time to match prices. By saving up rather than using credit, you avoid paying interest on the investment. And if you save rather than skipping bills or debts, well, you don’t have to deal with the many consequences of missing those bills.
Contribute to Savings Regularly
Putting money into a savings account each month can help you develop sound financial practices. You can also set it up, so the money is shifted from your regular account to your savings account. That way, to do these transactions on a monthly basis manually and your saving process is automated. You can then link this savings account to multiple investment accounts you have.
Error: Contact form not found.
4 steps to choosing the Right Sum Assured
Deciding whether you require a life insurance plan is easy. If you have dependents relying on your income, or you have financial liabilities, you most certainly need life insurance cover. Once you have decided to purchase a life insurance policy, the next step is to determine the amount of insurance cover (or the sum assured) that you/your dependents will need.
Ideally, the sum assured amount should be able to (in your absence):
- Serve as a replacement for your income
- Cover your outstanding debts
- Support your family to maintain their standard of living
- Support your family to accomplish various life and financial goals
That said, you might find it difficult to accurately predict your family’s exact financial needs at the time of purchasing a pure life insurance plan (term plan). One of the ways to arrive at the required insurance cover is to multiply your annual gross income by 10 (by a higher value if you are a young investor).
However, this calculation may lead to a high ballpark figure which may not be the answer to your family’s financial realities and their dependence on you.
Hence, a more methodical approach to arriving at the appropriate insurance cover /sum assured is shown in the step-by-step guide below:
Step 1: Begin with expected future earning years
Consider the number of years starting from now that you expect to be earning. Since life insurance serves as an income replacement tool, the years of income it needs to replace will impact the appropriate sum assured. For instance, if you are 30 right now and wish to retire when you’re 58 your future earning years are 28 which impacts the required sum assured.
Step 2: Chart out the sum of all annual expenses
The objective here is to identify your likely recurring financial outgoes.
Factor in all current and ongoing expenditure such as rent, school fees, fuel bills, healthcare expenses, grocery and utility bills, and other miscellaneous (discretionary) expenses on hobbies and entertainment. Also consider periodic spendings such as vacations, gifts, and purchase of white goods.
Your insurance coverage should be able to cover for these expenses on a year-on-year basis even as inflation leads to these outgoes increasing each year. Hence, a) Plot the recurring outgoes year-on-year including expected inflation, b) Calculate the present value of the same using current interest rates (say FD rates) for discounting.
Step 3: Account for major life stage goals and changes
Chart out the various landmark stages in life wherein your family might need large lump-sum amounts. These include weddings, higher education expenses, overseas travel, retirement, etc.
If you are already saving for the same through regular investment, add the expected recurring savings to the cash-flows plotted in Step 2.
Ensure you add the expected savings amount to meet your goals which may be more than what you are currently saving.
If you foresee an increase in the recurring expenses, add the same into the cash-flow projection. For instance, if you want to welcome your first child 3 years from now, the additional monthly expenses (e.g. additional rent, cost of child care etc.) that you would incur post your child is born should figure in your calculation.
Step 4: Add all liabilities, subtract savings and investments
Stack all your liabilities – car loan, personal loan, home loan, other debt — and add the amount to the present value calculated in Step 2 and adjusted for life stage goals in Step 3.
Subtract existing life cover (guaranteed death benefits of your life insurance policies), if any. Also, subtract the value of your investment portfolio from this figure.
The final total that you will arrive at, by the end of this guide, should be the sum assured that you opt for when buying a life insurance (term) plan.
Human life value calculators are also available online can help you with your calculations to arrive at the insurance cover for your family.
Error: Contact form not found.
Term insurance should occupy the pole position in your insurance portfolio: Know why
The primary objective of insurance is to protect your family members and dependents against financial insecurities in your absence, and hence should be the cornerstone of a sound financial plan. While your insurance portfolio may comprise of a number of products serving various life stage needs, it is term insurance that should really occupy the pole position.
Read on to know more about the benefits of term insurance
Provides substantial life cover at affordable premiums
Fiscal prudence calls for a large safety net that would help your family stay financially independent when you are no longer around. A term life insurance plan helps you achieve exactly that — you get a substantial life cover at a nominal premium.
A 30-year-old non-smoking male can avail a life cover of Rs. 1 crore – over a period of 30 years – by paying a nominal monthly premium of around Rs. 700 In case of death of the insured person within the policy term, his nominee would get the sum assured and with it, meet both present and future needs.
Stated simply, a term plan acts as a tool for income replacement for the family of the deceased. You can calculate the premiums applicable to you with the help of this calculator.
Helps your family pay off liabilities
Today, liabilities in the form of loans are a reality for most Indians during their working years to provide for important life goals such as owning a home or providing for children’s education. The onus of repaying the debt would fall on your family should an untoward incident arise. Simply put, the family then (spouse or child) would need to repay the loan in your absence. This can be a challenge especially if you have been the sole breadwinner in the family.
This is where a term insurance policy comes to your rescue. Proceeds from the term plan can help repay the loan, thereby allowing your family members to become debt-free. Debts can be a cause of major financial stress, something that can affect other goals. However, a term insurance plan in your portfolio provides the financial safety net for your family.
Keeps essential life goals on track
If you are the only earning member in your family, your sudden absence can derail other critical life goals such as your children’s higher education or marriage. However, a term plan helps keep these goals on track.
The death benefit received from a term plan can be used to address these goals that might otherwise get compromised in the absence of the family’s chief bread-earner. The death benefit received from a term insurance plan gives financial support to realize these life goals without anxiety and compromise.
Serves as a supplementary source of income
Without a steady source of income, it can be difficult to manage even the regular expenses – rent, utility, grocery bills, school fees. In the absence of the family’s principal earner, the inability to meet these expenses can potentially disrupt your family’s lifestyle. However, with a term insurance plan, things can move on uninterrupted.
Today, most plans offer the choice for pay-outs that can be either lump-sum or staggered. While with the former, the entire death benefit is paid at one go, the latter pays out monthly benefits over a period of time. One can choose to take part of the benefits as a lump sum and rest as a monthly income stream. While the monthly income can help meet regular expenses, the lump sum can either be used to pay off outstanding loans or be invested for long term goals. A monthly income stream instead of a lump sum helps the surviving family manage monies systematically. Taking out the entire benefit as a lump sum and then running regular expenses from the interest earned on the amount deposited in a bank is an alternative but only for the financially savvy. While all benefits (including monthly income) paid directly by the insurance company are tax-free, the interest earned from a bank deposit would be taxable.
The final word
As is evident, a term plan secures your family’s financial interests in your absence. It helps your dependents maintain their standard of living and address all essential goals when you are no longer around.
At the same time, you have complete peace of mind, knowing that people close to you would not have to deal with monetary hardships should an adverse circumstance crop up. Before buying a term insurance plan, you should ideally compare quotes from multiple insurers, probe into their respective Claim Settlement Ratios as well as available riders in order to make an informed choice
Note that the earlier you buy a term plan in your life, the better it is considering it would command a lower premium. With each year that you delay insurance purchase, the premium jumps up. It is expected that one is healthier when younger and hence chances are that insurers would deem you a safer prospect which means you do not pay additional premium owing to age-related health concerns
Error: Contact form not found.
Retirement Planning
“The longer you live, the more money you’ll need”
Retirement planning is the process of planning for life after work ends. It includes setting financial and non-financial goals and planning how to achieve them. Financial goals revolve around how much you want to save for each of your goals such as, at what age to retire, how much to save for retirement, where to live and so on.
Retirement planning has three stages:
1. At the beginning of work life, retirement planning means setting aside money for retirement.
2. In the middle of career, it means saving and allocating money to various asset classes. It also involves taking the necessary steps to achieve expected return on investments.
3. On reaching retirement age, you don’t pay but your investments pay you.
Need for retirement planning:
A good retired life is the outcome of sound planning and monitoring. Nothing great comes instantly. People start worrying about retirement when they hit their 50s. You need to understand, retirement planning is a long process. It is not something that can be planned overnight.
1. Retirement planning is necessary to retain financial independence and maintain a comfortable lifestyle after you stop working. When no income flows into your bank account, it gets difficult to maintain the same SOL (Standard Of Living) as before.
2. You need a constant flow of income even after retirement. You might want to work in retirement to keep yourself occupied, but can you rely on that income?
3. You might want to have a great retirement life. To achieve it you’ll have to actually save and invest money regularly.
4. With growing age, you’re bound to develop health problems. Medical inflation is rising at the rate of 20% each year. If you haven’t saved enough for retirement, medical expenses will make a huge dent in savings.
5. Inflation is not under your control. No matter how much you earn, inflation eats up your money. If you can’t handle inflation with a good job today, what will happen on retirement?
6. You’ll not be free from responsibilities even in retirement. In fact, you’ll be your first responsibility. You might want to take vacations. You might have to get your children married. You will want to leave behind property or assets for them.
7. Life expectancy has gone up in the last decade. The longer you live, the more money you’ll need.
Some of point need to know:
1. Diversify your retirement portfolio. Invest in fixed income options like FDs , Guaranteed monthly income plans & annuities to earn regular income.
2. With advancing age, you should move to less risky options. You don’t want the retirement fund to run out.
3. Don’t overspend. There’s nothing wrong in retiring early. But, keep track of your retirement portfolio. Monitor and make the necessary changes from time to time.
4. Make sure you pay off all your loans before retiring. If you keep paying off loans after retiring, EMIs will make a huge dent in the retirement corpus.
Following are the benefits of retirement plans:
1. Option in investment: Certain retirement plans give you the option to invest in government securities, debt and equities depending on your risk profile.
2. Long-term savings: Retirement plans are long-term savings schemes. Returns are assured.
3. Choose your payouts: You can choose how you wish to receive the annuity payments, either as a lump sum or instalments.
4. Works like a life insurance cover: Certain pension plans pay a lump sum on retirement or on death, whichever is earlier. Pension plans work just like a life insurance plan.
5. Negates inflation effect: As retirement plans are for the long-term, the effect of inflation is negated.
6. Access funds during an emergency: Most pension plans allow you to access funds for emergencies.
Following are the common features of pension plans:
1. Guaranteed pension: Pension plans give a fixed and steady income after retiring, or immediately after investing, depending on the plan chosen. Thus, you can enjoy a financially independent retirement life.
2. Tax-efficiency: Most pension plans offer tax exemption under Section 80C, 80CCC and 80CCD of the Income Tax Act, 1961.
3. Liquidity: Retirement plans have low liquidity. Some pension plans offer premature withdrawals subject to conditions like tax implications and penalties.
4. Vesting age: This is the age when you start receiving the monthly pension.
5. Accumulation phase: This is the phase where you have to make investments. Investments can be made in lump sum or instalments. In this phase, investments accumulate and wealth is created. Generally, only a few plans allow withdrawals during this phase.
6. Payment period: This is the period in which you receive the pension after retirement. Most plans keep payment period separate from the accumulation period.
7. Surrender value: This is the value that you get on surrendering a retirement plan before maturity. This is not a smart move as you lose certain benefits of the plan including the sum assured and insurance cover (if the plan offers any).
8. Limited tax deductions: Retirement plans offer attractive tax benefits. However, the deductions are restricted to the ceiling limits of the respective sections of the Income Tax Act.
9. Taxation on returns: The maturity proceeds of most retirement plans are taxable.
10. High returns demand high risk: If you expect high returns and high-payout at the time of retirement, you have to assume high risk in terms of market fluctuations.
Error: Contact form not found.
