Financial planning is an important part of planning for the future financial needs of the family. A proper plan acts as a guide through the financial journey of your family. It gives you clear goals, opportunities, helps you to cut your losses, enhances your gains and avoids panic in emergency situations. In this article we talk about Family Financial Planning.
A good financial plan will take care of all your needs and wants. It will help you to invest your money wisely in the right opportunities and you can avail of this money at the time you need it.
Family Financial Planning
How much Life Insurance should you take?
A sudden death of the only earning member of the family throws the entire family into a financial distress. It is important that one should take an adequate life insurance cover to ensure that there are no heavy financial difficulties faced by the family. According to the common general rule, one should take a sum assured of around 8-10 times of one’s annual income.
How much should be your Emergency contingency fund?
A contingency fund is required to meet any emergencies such as sudden death, unemployment, loss of income or any medical emergency etc. It is advisable to keep around 5-6 months expenses in the emergency fund.
If you are a government employee where the stability is high, you can keep around 3 months of your expenses. But in case of self-employment, businessmen or private sector employees where the stability is low, you need to put around 6 month’s expenses in the emergency fund.
In case of a retired person, it is advisable to keep an emergency fund of your annual expenses.
How much Heath and Personal Accident insurance needs to be taken?
Most of the time, people are satisfied with the basic health insurance given at their work place. It is advisable to take an additional individual and family floater policy. Additional Personal accident insurance with the TTD cover will meet the contingencies and the loss of income arising out of prolonged recovery.
How much should you invest every month to achieve your retirement goals?
It is ideal to save around 20% of one’s income from the beginning of one’s career. The average retirement age is 60 years.
If you start saving later in life, you should add 5% more of your income in each decade that you have not saved. Also note that the rate of savings will increase, if you plan to retire early in life.
A Retirement plan is a must as inflation is rising and the life span of a person has also increased.
How should you allocate assets between different investments?
Asset allocation is a crucial part of investment planning. A common general rule is that one needs to take an equity exposure which is equal to 100 minus your current age. In other words your debt exposure should be equivalent to your current age. For e.g. if one is 40 years, then you may allocate 60% to equity and the balance 40% to debt.
It is advisable to seek good advice from fee based investment advisors for your asset allocation, as they are independent and unbiased.
How much do you want to spend on your house?
The value of your house should not be more than 3 times the family’s annual income. If the total household income is 40 lakhs annually, then your house should not be more than Rs.1.2 crores.
How much EMI should be deducted?
Almost all financial planners will agree that your total monthly EMI should not amount to more than 40% of the gross monthly family income.
In case of home loans, it should not be more than 30% of the gross income. Always add home loan insurance and household insurance cover in your home planning. As your retirement approaches, make your EMI less.
What should be my car expenditure?
The value of the car should not be more than 50% of the family’s annual income. Ideally, a new car is used for a period of 10 years.
The down payment should be minimum 20% of the value and the loan tenure should not extend to beyond 4 years. The EMI on the car loan should not be higher than 15% of the family’s monthly income.
Further, you also need to follow the basic principles of Investment as listed below:
Goal Based investing.
You should have clear goals before making your investment for e.g. funding children’s education, retirement corpus, marriage of children etc. The longer is the goal period, the less is the volatility.
Your Risk appetite.
You need to analyse whether you are a conservative, moderate or aggressive investor. For e.g., an aggressive investor will go in for higher risks and higher returns but at the same time will be in a position to absorb losses, if any. The conservative investor will go in for risk free investments with average returns.
Always invest in different asset classes like equity, real estate, debt, gold etc. This will ensure that you are insulated from the risks, as each class will perform differently under different market conditions.
Rebalancing and assessing of your investments regularly.
It is advisable to periodically review all your investments and try to restore balance by taking the decision to disinvest the non-performing investments.
The above are some of the basic rules of financial planning for the family. It is very important to consult a certified financial planner or a SEBI registered investment advisor as these advisors will provide good independent advice, which will be in your best interest.