Let's Make Financial Plan With Monika Halan
Whether you're Mukesh Ambani or someone struggling to make your ends meet, you need a financial plan. But that’s far easier said than done. Monika Halan , who has spent decades writing and speaking on personal finance, reveals in her book Let’s Talk Money, originally published in 2018, how we can start securing our financial future.
While Halan is right that a financial plan is a must to make money work hard for you, I’m keen on using the plan for a different reason. It allows me to spend guilt-free. Without the plan, every penny out of my pocket would hurt. Yes, I come from a middle-class family and have seen first-hand how painful shortage of money can be.
Once I know that I have already saved the money I may need in the future, I can spend what’s in my pocket freely. From experience I can tell you that it’s thrilling to spend that money. I sometimes even sing “Mai baarish kar dun paise ki (I’ll make money rain down)” when I’m spending that money.
So, let’s start. The first step to a financial plan is understanding your cash flows, and there are two ways to do it: the hard way and the easy way. The hard way is to keep track of every financial transaction you make using an app. While doing so is time-consuming and difficult initially, the hard way can help you manage your money in the most efficient way. The easy way is to keep track of your overall savings, investments and expenses.
You’ll be surprised to find out that the easy way is often good enough to secure your financial future. Halan suggests using different bank accounts for savings, investments, and expenses. As soon as your income pours in your savings account, let the excess money flow into investments and expenses accounts. Why do we need separate accounts? Behavioral finance. Once we have assigned money for a specific purpose, our mind is extra supportive in helping us stick to the financial plan.
How much to save, invest, and spend? The answer to that depends on the following “What if” questions.
Let’s tackle each question one-by-one.
First, what if an emergency—something I can’t predict and insure against—happens?
The truth is shit happens. It’s a cliché for a reason. We live in a world where you may get fired, even if you are the chief executive officer, because an Elon Musk buys your company and decides to cut costs.
Worry not. Here an emergency fund comes to your rescue. Save at least six months to 24 months of your living costs, before you start investing. Will six months of living expenses be good enough in an emergency? That depends on what makes you feel safe.
“We have to decide how much protection we need. Go out wearing a seat belt in a fully serviced car with tested breaks and good tyres or go out in an armoured car, fearing an accident? We need to choose the protection we want,” Halan writes.
She suggests parking your emergency fund in fixed deposits and very safe debt funds.
As an aside, please don’t keep any money under the mattress. Prime Minister Narendra Modi doesn’t seem to like it, and he may even demonetize some denomination of notes. His speech on 8 November 2016 is still fresh in our minds: “We have decided that the five hundred rupee and thousand rupee currency notes presently in use will no longer be legal tender from midnight tonight… The five hundred and thousand rupee notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper.”
Mitron, let’s go to the second question: what if I get sick or meet with an accident and can’t afford my treatment?
“You’re more likely to go to hospital with an illness or accident than die,” says Halan. So, a medical cover is probably more important than a life insurance.
But company medical cover should take care of it, right? Wrong. Halan gives two reasons to have your own policy: one, what if you get fired or decide to quit, and second, getting the cover after retirement at age 60 will be hard. I prefer to check with my company if I’ll be allowed to continue my health insurance post-retirement; of course, I’ll pay premiums on my own then.
Which policy to go for? Unfortunately, searching for the right policy is excruciating, so much so that Halan asks readers to reach out to a financial planner with some insights from her book. Good luck!
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Third, what if I die sooner than I’m expected to? How will it affect my dependents?
Death too happens. Unless you make peace with the fact that you can die any day, anytime, and anywhere, you won’t be able to die responsibly. And how you die speaks as much about you as how you live.
Just buy a simple term insurance. Shockingly, no agent will sell you this vanilla product because the commissions on simple term insurance are too low to make it worth his while.
AND PLEASE DON'T MIX INSURANCE WITH INVESTMENT. This is the most common mistake people make. The returns on financial products that mix life cover and investments are grotesque. But then why do people buy such policies? Agents use all sorts of emotional sorcery to push these products because they make hefty commissions selling them to unsuspecting customers. Please stay away from such agents and policies.
Let’s tackle the next two questions now: what if I want to financially support my children in their education and marriage, and what if I want to maintain my lifestyle even after I retire?
Once you have taken care of emergency fund and health and life insurance, you can start taking some risk to earn decent returns.
First, make a list of all the expected expenses and map each of them to when you’re likely to incur them. Let’s take the case of your child’s marriage. You may expect it to cost 10 million rupees and happen 10 years from now. Don't get bogged down trying to get the numbers right. Guesstimates are fine. Chill.
Once you have done this exercise, you’ll be able to put each expense into short-term (2-5 years), medium-term (5-10 years) and long-term (over 10 years) buckets. This process will tell you how much short-, medium- and long-term investments you need. Now you can choose lower-risk investments for short-term needs and higher-risk products that offer higher returns for long-term needs.
One easy way is to meet 80% of your short-term expenses with debt and 20% with equity, 50% of your medium-term expenses with debt and 50% with equity, and finally, 80% of your long-term expenses with equity and 20% with debt. Debt tends to be low-risk, low-return product, while equity is usually high-risk, high-return. You can consider well-diversified mutual funds for both debt and equity investments.
What about real estate and gold?
Invest in real estate only if you have sufficient expertise in it.
And avoid gold as an investment. Yes, you read that right. Considering Indian mindset, Halan recommends limiting gold investments to 5-10% of your portfolio and that too in government gold bonds. Sure, buy jewelry because you like shiny things. But please don’t call it an investment.
Finally, what if I die with several assets on my name?
Make a will. Just do it.
The last thing you want when you die is your family fighting over your assets. Life is enough drama already, isn't it? Why ignite more of it after your death?
“Not making a will will tick the ‘most-selfish-thing-I’ve-every-done’ box in my book,” Halan writes.
That’s it. Congratulations, you’ve a broad financial plan, thanks to Monika Halan . Please update it regularly and as and when life throws a curveball.
For more, please read her book and check out her website: https://www.monikahalan.com/
I’m Rahul Satija, and I’m on a mission to help you achieve your financial goals. If you liked the article, please take a moment to share it with your friends and family.
Disclaimer: Any view expressed in the article is my own. The article is meant for only educational purpose. Please share your feedback at [email protected] .
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2 个月Very informative