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Financial Planning At Career Beginning

Author: Balwant Jain/Wednesday, May 27, 2020/Categories: Exclusive

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Financial Planning At Career Beginning

Financial planning involves setting various financial goals in your life. In this article, I will discuss how a young unmarried person at the age of 25 years should plan for his financial planning at the beginning of his career. For understanding purpose, I have presumed that the monthly take home salary is Rs40,000 per month, which roughly comes to Rs5 lakhs annually.

First step towards financial planning: Buy an accident insurance. At the young age, the probability of death by illness is very low than it being caused due to an accident. One should immediately buy a personal accident policy, which is a low cost insurance solution for those who can’t afford life insurance premium at the initial stage of their career. You should buy accident insurance equal to minimum 12 times of your annual income i.e. for Rs60 lakhs, which will cost you around Rs9,000 per year. It covers death as well as physical disability caused due to any accident.

Second step: Buy a health insurance. With increasing costs of medical treatment, it is very important for you to have adequate health insurance. Buy health insurance even if your present employer provides one. Because it may happen that when you switch your job the new employer may not provide it. If you buy the health insurance then it may not cover any pre existing diseases for next three to four years. The amount of health insurance you need to buy will depend on which city you live in. Medical treatment in metro cities is costlier than in small places so the amount of health insurance cover you need to buy will depend vary. If the employer covers your parents as well in that office policy earmark that policy for your parents as it covers pre existing disease from day one. You need to buy a health insurance policy of minimum of Rs5 lakhs, which will cost you around Rs7,500 annually. Buy a separate policy for your parents also of adequate amount.

Third step: Buy a life insurance. Since your parents are partly dependent on your income, you need to buy a life insurance for a minimum amount equal to 15 times of your annual income i.e. Rs75 lakhs. As a thumb rule one should buy life insurance equal to 10 to 12 times of annual income. However, as your income will increase in the future, but the insurance premiums go up with advancing the age, so it is prudent to lock the premium for rest of the tenure by taking higher cover. You should buy life insurance till your retirement i.e. cover for 35 years.

You also need to buy life insurance in case you have taken any home loan so as to ensure that your legal heirs inherit the house and not the home loan. For the purpose of life insurance needs, one should always buy a term insurance only. Since you are technology savvy you should buy online term plan which is cheaper than regular term plans. Please review your insurance needs after your marriage, birth of children and increase in your income periodically.

Create Contingency Fund

You should have a contingency fund for at least minimum six months to take care of expenses in case you lose your job. You need create the contingency fund equal to Rs2.40 lakhs. Since the contingency fund is supposed to be easily accessible and the returns should not be volatile, you should invest this contingency fund in liquid fund of any reputed fund house. Moreover, I would advise you to get a credit card also. Credit card is a double edged sword and should be used very sparingly. Careless use of credit card can lend you in debt trap. It should only be used in case of emergency and not for paying your day today expenses. The credit card can come as a supplement to the contingency fund.

Down payment for purchasing house

Since you can get a home loan upto 90 per cent of the value of the house if the loan amount does not exceed Rs30 lakhs, you can buy a house costing around Rs30-33 lakhs with a margin money of Rs3 lakhs. I have presumed that you will buy a house after five years. Since time horizon for accumulating the margin money is five years. You should invest in aggressive hybrid fund through Systematic Investment Plan (SIP). For accumulating Rs3 lakhs in next five years you need to invest Rs3,650 every month assuming a conservative average annual return of 12 per cent (Net of tax).

Planning for Marriage Expenses

It is assumed that you will need to accumulate Rs10 lakhs after seven years for your marriage. As the period available is reasonably long, you should invest in large cap funds. For accumulating Rs10 lakhs in seven years you have to invest Rs7,650 through SIP assuming average annual return of 12 per cent per annum.

Retirement Planning

Since you are not married and therefore can’t have any goals of child education and marriage at present. But whether you are married or not or whether you have children or not, like taxes retirement is also almost certainty therefore you have to treat retirement planning as vital goal.

Rationally and logically you should start saving for your retirement from your first salary. With the surplus of Rs6,850 left every month out of your salary an amount of Rs10 crores can be accumulated in 35 years by investing in midcap funds. These funds though volatile in short term can give you a return of 15 per cent (Net of tax) for such long tenure. You can invest in Equity Linked Saving Scheme, popularly known as ELSS, if you have any tax liability and earmark the same for your retirement goal. I have not considered the retirement benefits receivable at superannuation in this computation.

Please review your goals and investments periodically to achieve various financial goals.

The writer is a tax and investment expert and can be reached at jainbalwant@gmail.com and on his twitter handle @jainbalwant

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