Financial Fortification: Where to start?

I draw my inspiration & education from freefincal, subramoney. You should go there if you want more depth.

Who the hell am I and what gives me the right to talk about finance? My mistakes & error correction!

I did these things in 2013:

Bought a second house taking second Home loan . The thought process was:
I get salary; my wife gets salary and there is surplus every month. So i asked around some uncles and relatives who in turn suggested buy a house. Asked the friend of a friend what to do to cover liabilities and took Endowment policy.

Mistake 1: Buying a house without proper analysis. (Increased liabilities for very small returns).
Mistake 2: Lazy thinking that an LIC agent will do 'good' for me as he is relative of my friend in our community (which he did not as his commission trumps my wellbeing).
Impact/ Loss : Taking the endowment policy of 90L sum assured for a huge yearly premium of 2 Lakhs (60L in premium payment over 30 years) which when invested properly (even with very little education) could have easily fetched inflation beating returns.

Luckily, in June 2014, I got a queasy feeling that I am doing something wrong with my money. 2L per annum premium for 90L coverage just did not add up as good deal. So I started reading some finance blogs ( RamitSethi, jagoinvestor, ashal jauhari, pattu- freefincal, subramoney) and got a clarity and methodology about money decisions. I started course correcting.

Now, in 2016, I am able to (with proper logic and numbers) enhance the financial situations of 10 of my friends and family members. My brother insisted that I share this knowledge so it may help you.

Financial Fortification:

See if the following resonates with you.

• "What little things do I need to know to invest wisely and allow my money grow? In the world of mutual funds, compounding, term plans, ULIPs, endowment policies, life insure, medical insurance, riders, fixed deposits, recurring deposits, savings accounts, liquid funds, growth plan, dividend plan, etc, etc. how do i make sense of it all? "(most of that is useless jargon anyway)
• "I know about mutual funds, tax savings, insurance. But I just use RD same as my parents even though I know I should do better. Now, where do I begin?"
• "What is financial fortification, and how to create a sensible financial plan ?"
• "Savings was the only way to get rich for our parents. I know times are changing and i want to learn about investing step by step, with hand holding. How to proceed?"

By the end of series, you will have good knowledge and also would have started investing ~ in a SAFE and SECURE way!

Financial Fortification (in the same order):

1. Term Plan (Life Insurance)
2. Medical Insurance
3. Emergency Fund
4. Debt/Loan Repayments
5. Investing to reach financial goals (leveraging savings account, liquid fund, mutual funds, stock market, gold, real estate).

Let us understand these in detail.

Term Plan

This is the first step in financial fortification.

40% of my income goes towards my home loan EMI. If I die today, how will my non earning family members pay that EMI or survive? 

The answer is TERM PLAN. This is called life insurance.

This is relevant if you have financial liabilities

Medical Insurance

This is the second step in financial fortification.

This is for emotional security. Last year, my brother had dengue and it cost INR 25000 for 3 days of hospitalization. He is a yoga practitioner/ teacher. He does not get even a cold or fever. But dengue happened. Thanks to his health insurance (well, thanks to me here because i suggested it) he did not have to dip into his savings/ investments.

So, get a basic medical cover which needs low premium for high sum assured. Looking at your scenario, you can personalize it.

Emergency Fund

Money needed in case of emergency.

If you lost your job today, and did not get one for next 6 months, can you sustain your expenses (rent, EMI, medical and other non negotiable expenses) - without this affecting your emotions negatively?

Other examples of emergencies:  laptop / computer crash, initial payment to hospital who do not accept credit card when medical emergency arises, bike repair.

Debt/ Loan Repayment:

Target finishing off all credit card debts, education loan, personal loan, house loan & debts to friends/ family in the same order. Not all at once. Device a plan in such a way, after setting aside money for insurances and emergencies, the majority of your income should go towards finishing these loans off and little on saving and investments. With time, as the loans reduce, the amount on investment shall increase.

Investments (long and short term investing):

Now comes the juicy part. Now lets actually make some money. 

When I say investment, don't think about:

• Tax saving
• Stock market/ day trade (with knowledge, you may be able to do this in near future. For now keep it aside.)
• Get rich quick schemes

So, what to think about then? GOALS.

Specifically LONG TERM GOALS. (like retirement, house down payment, child's education, lump sum expense for family functions and other predictable but huge expenses).

If you are asking, "How can I buy that car next year?" or "how can I make it to Tomorrowland (Europe festival) this year?", sure, these are called short term goals. 

Use the following for short term goals:

• Increase your income
• Use a recurring deposit - a systematic saving - earmarked for that expense.
• Look at your expense and cut down on shopping or entertainment or other negotiables and increase specific saving
• Send any surplus money towards liquid fund investment, which is a smart investment tool, sometimes better than recurring deposit and fixed deposit.
• Use a fixed deposit 

Goal based long term investing:

Now, this is where you actually grow your money, even if you invest small amounts consistently. The magic here is compound interest. Let's understand.

Illustration:

Ram, 25 years old started investing 5000/ month in 1st year, 5500/ month next year... and so on...  for 30 years. In various instruments, his returns comparison below.

	Invested amount	Mutual Fund (12%)	RD (8%)	PPF (9%)
10 years later	9.5 Lakhs	17 Lakhs	14 lakhs	14.8 Lakhs
20 years later	34 Lakhs	98 lakhs	67 Lakhs	73.5 Lakhs
30 years later	99 Lakhs	4.2 crores	2.39 Crores	2.74 Crores

Kumar, 25 years old started investing 1000/ month for 30 years.  

	Invested amount	Mutual Fund (12%)	RD (8%)	PPF (9%)
10 years later	1.91 lakhs	3.4 Lakhs	2.8 Lakhs	3 Lakhs
20 years later	6.75 Lakhs	20 Lakhs	13.4 Lakhs	14.7 Lakhs
30 years later	19.74 Lakhs	84 Lakhs	47.8 Lakhs	54.7 Lakhs

So, as you can see... the best time to invest INR 5000/month was 10 years ago.

The next best thing is to invest now.

If not INR 5000, start with as little as INR 1000 or even 500. 

Conclusion:

A basic thumb rule of money allocation - set aside 20% of monthly income for goal oriented long term investments, 5% for short term goals, emergencies.

Deeper understanding on the next post.