Prabu was a college student till yesterday. Today he has got
a job. He has changed his costume from T-shirt and jeans to a formal wear with
a tie. When he got his first pay cheque, his father advised him to save, his
girl friend asked him to take her out on a date, and his friends wanted a
party. Prabu was totally confused what to do with his first salary. What are
all his actual priorities? Let us help him by laying out a step by step initial
financial plan for him.
Get a PAN Card:
PAN Card is an ID card issued by income tax department. This card is useful in filing your Income Tax
returns. Apart from this, the PAN card is very much useful in opening a bank
a\c, demat a\c, investing in mutual funds and the like. The required documents
for getting a PAN card is a passport size photo, address proof and an
identification proof. You need to apply with either UTI or NSDL. They are the
two approved agencies by income tax department for issuing PAN card.
Personal Accident and Disability Insurance:
Almost every day you can find a news column about road
accident. It may be your colleague, your distant relative, your neighbor, your
friend, your classmate. The stories of such incidents give us a reminder that
the accidents can happen to anyone. The impact of these accidents on ones
working life could be huge. Some accidents could reduce our employability
temporarily or permanently. Personal accident and disability insurance policies
will cover the financial losses arising out of accident and disability.
You need to decide the coverage amount of this policy based
on the estimated loss you may suffer because of accident. That is how much loss
you may incur from employment temporarily or permanently because of the
accident. This will cost you approximately Rs.1500 p.a for a coverage of Rs.10
lakhs.
Health Insurance:
Most people don’t think about health insurance very
often. But it comes to mind first when a
loved one is sick. Under health
insurance, the insurance company pays the medical bills if the insured person
becomes sick and hospitalized. Health insurance can protect a family from
financial damage in case of severe and serious illness.
If you have a health insurance from your employer, that may
not be sufficient. Employer may cover the employee and not his family members.
And moreover these policies are not portable and cannot be individualized if
you leave the job. Employer provided policies cannot be transferred to another
employer in case you switch your job. Also employer provided policies will give
you coverage as long as you are employed. Once you retire you may not be having
coverage. It is really unfortunate that only after your retirement you need
health insurance at the most. If you plan to take a fresh policy after
retirement, insurance company will not cover the pre-existing diseases at that
point in time. Though your employer provides a health insurance policy it is
better for you to take a separate health insurance policy at least with a small
amount of coverage.
The coverage amount of the health insurance policy need to
be decided based on your health consciousness, your family health history, and
the class of hospital you choose for treatments.
Term Insurance:
Generally as a beginner, there will not be any requirement
for any life insurance. But if your parents are financially depending on you,
then you need to cover yourself with life insurance. As a breadwinner, today
you are there for your family to provide a lifestyle. In case of any
mishappening to you, your family members should not compromise on their
lifestyle. That is why it is advisable to cover yourself with life insurance if
you have dependents.
But don’t fall prey for ulips. Go for a pure term insurance
policy. These policies give you a high coverage with low premium. The premium
for a sum assured of Rs.10 lakhs will cost a 25 year old only Rs.2500 p.a.
approximately.
Emergency Reserve:
Once you have completed the above obligations, you need to
build an emergency reserve or contingency fund. One aspect of financial
planning involves planning for situations where there could be a temporary
break in one’s professional income. This could happen, amongst other reasons,
due to ill health or could even be self opted. Such planning requires creation
of contingency fund. The size of a contingency fund is linked to one’s estimate
of what could be the maximum duration of such a break. For instance some people
plan for the possibility of a 3 months break, others for 6 months.
This emergency fund gives a psychological security to you.
In case you need to quit you r present job and need to search a new one, you
can do that comfortably and confidently as you have an emergency fund for the
intermediate period. You need not panic. If you have created a contingency fund,
in the event of any emergency you need not pre-close your other investments and
hence you avoid paying penalty or booking losses.
Tax Planning:
You can save under section 80 C up to Rs.120000. Out of this
Rs.20000 need to be invested in the infrastructure bonds and the balance
Rs.100000 can be invested in NSC, PPF, insurance premium, and ELSS mutual
funds., You can give maximum allocation to ELSS mutual funds, as you are so
young and in the beginning of your career.
Other goals:
You may have other goals like buying a laptop, higher
studies, and vacation. You need to plan for all these goals. You need to keep
in mind two things before deciding an investment. They are your risk tolerance
and time horizon. How much risk you are afford to take and psychologically
comfortable in taking? When do you need this money back? Based on the answers
to these questions you need to choose the right kind of investment plan.
Plan out your work and work out your plan. Normally we don’t
plan to fail, but we fail to plan.If you work on your financial plan, when your
friends are partying and taking their girlfriends out, you will be definitely
going to be retired richer than your friends.
The author is Ramalingam K, an MBA (Finance) and
Certified Financial Planner. He is
the Founder and Director of Holistic
Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and
Wealth Management. He can be reached at ramalingam@holisticinvestment.in.
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