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A Financial Plan That Works For Everyone

To get anywhere, you need a plan and the same goes for your financial future. Unfortunately a financial plan appears, to most of us, like a visit to the dentist - something to postpone until you wake up screaming in the middle of the night. So we came up with a financial plan that's more like a visit to your favourite cafe. It involves forming simple habits and takes less than an hour to start implementing.

To get anywhere, you need a plan and the same goes for your financial future. Unfortunately. a financial plan appears, to most of us, like a visit to the dentist - something to postpone until you wake up screaming in the middle of the night.

So we came up with a financial plan that's more like a visit to your favourite coffee shop. It involves forming simple habits and takes less than an hour to start implementing.

Investing, tax planning

  1. Maximise your Employee Provident Fund (EPF) contribution. If your total contribution (including your employer's) to EPF is less than Rs 1.5 lakh, invest the difference in Tax Saving (ELSS) funds. Your tax planning is done.
  2. Invest 30% of your take home salary in diversified equity mutual funds. Never invest directly in stocks. Schedule a SIP to automate this habit.
  3. Got your annual bonus? Invest 50% of it in a 5 year auto-renewing bank FD. This is your emergency fund.
  4. Invest the remaining bonus in yourself - take a course, travel, do fun stuff.
  5. If you have a home loan, split the bonus 3 ways - one third to prepay the loan.

Insurance

  1. If you have people who depend on your income, then buy a 40 year term life insurance plan at 25, then a 30 year plan at 35 and a 20 year plan at 45. Every time make sure the total sum insured is 30x your then salary. There is no need to buy a life insurance policy unless you have dependents.
  2. Buy health insurance for every member of your family. Even if you're covered by your employer.
  3. Buy insurance for your car, your house and its contents.
  4. Renew your insurance every year 1 month in advance.

Please note that I said "buy" not invest. Insurance is not an investment.

Loans

  1. Only ever take a loan to buy a home. Never more than 75% and never longer than 15 years. Pay it off within 7 years. Yes, it's possible.

Bonus tips

  1. Maintain a single no frills bank account and a single no frills credit card.
  2. Set all your bills (electricity, phone etc) to auto-debit to your credit card every month.
  3. Pay off your credit card every month - in full. Set it to auto-debit your bank account every month.
  4. Contribute to charity - your time is better but some money will do as well.

Congratulations! You've just set yourself up for a comfortable financial future.

(This plan assumes you start earning at 25 and retire at 60. Other planning assumptions are based on what's the norm in India. This plan does not cover a transition to retirement and is most suitable for people below 50)

(This post was updated to reflect the changed tax rules in 2014)

Please go through the comments below, as well. Some interesting ideas have been discussed there by our community.

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