Prabu was a college student till yesterday. Today he has gota job. He has changed his costume from T-shirt and jeans to a formal wear witha tie. When he got his first pay cheque, his father advised him to save, hisgirl friend asked him to take her out on a date, and his friends wanted aparty. Prabu was totally confused what to do with his first salary. What areall his actual priorities? Let us help him by laying out a step by step initialfinancial 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 Taxreturns. Apart from this, the PAN card is very much useful in opening a bankac, demat ac, investing in mutual funds and the like. The required documentsfor getting a PAN card is a passport size photo, address proof and anidentification proof. You need to apply with either UTI or NSDL. They are thetwo 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 roadaccident. It may be your colleague, your distant relative, your neighbor, yourfriend, your classmate. The stories of such incidents give us a reminder thatthe accidents can happen to anyone. The impact of these accidents on onesworking life could be huge. Some accidents could reduce our employabilitytemporarily or permanently. Personal accident and disability insurance policieswill cover the financial losses arising out of accident and disability.
You need to decide the coverage amount of this policy basedon the estimated loss you may suffer because of accident. That is how much lossyou may incur from employment temporarily or permanently because of theaccident. This will cost you approximately Rs.1500 p.a for a coverage of Rs.10lakhs.
Most people don’t think about health insurance veryoften. But it comes to mind first when aloved one is sick. Under healthinsurance, the insurance company pays the medical bills if the insured personbecomes sick and hospitalized. Health insurance can protect a family fromfinancial damage in case of severe and serious illness.
If you have a health insurance from your employer, that maynot be sufficient. Employer may cover the employee and not his family members.And moreover these policies are not portable and cannot be individualized ifyou leave the job. Employer provided policies cannot be transferred to anotheremployer in case you switch your job. Also employer provided policies will giveyou coverage as long as you are employed. Once you retire you may not be havingcoverage. It is really unfortunate that only after your retirement you needhealth insurance at the most. If you plan to take a fresh policy afterretirement, insurance company will not cover the pre-existing diseases at thatpoint in time. Though your employer provides a health insurance policy it isbetter for you to take a separate health insurance policy at least with a smallamount of coverage.
The coverage amount of the health insurance policy need tobe decided based on your health consciousness, your family health history, andthe class of hospital you choose for treatments.
Generally as a beginner, there will not be any requirementfor any life insurance. But if your parents are financially depending on you,then you need to cover yourself with life insurance. As a breadwinner, todayyou are there for your family to provide a lifestyle. In case of anymishappening to you, your family members should not compromise on theirlifestyle. That is why it is advisable to cover yourself with life insurance ifyou have dependents.
But don’t fall prey for ulips. Go for a pure term insurancepolicy. These policies give you a high coverage with low premium. The premiumfor a sum assured of Rs.10 lakhs will cost a 25 year old only Rs.2500 p.a.approximately.
Once you have completed the above obligations, you need tobuild an emergency reserve or contingency fund. One aspect of financialplanning involves planning for situations where there could be a temporarybreak in one’s professional income. This could happen, amongst other reasons,due to ill health or could even be self opted. Such planning requires creationof contingency fund. The size of a contingency fund is linked to one’s estimateof what could be the maximum duration of such a break. For instance some peopleplan 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, youcan do that comfortably and confidently as you have an emergency fund for theintermediate 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 andhence you avoid paying penalty or booking losses.
You can save under section 80 C up to Rs.120000. Out of thisRs.20000 need to be invested in the infrastructure bonds and the balanceRs.100000 can be invested in NSC, PPF, insurance premium, and ELSS mutualfunds., You can give maximum allocation to ELSS mutual funds, as you are soyoung and in the beginning of your career.
You may have other goals like buying a laptop, higherstudies, and vacation. You need to plan for all these goals. You need to keepin mind two things before deciding an investment. They are your risk toleranceand time horizon. How much risk you are afford to take and psychologicallycomfortable in taking? When do you need this money back? Based on the answersto these questions you need to choose the right kind of investment plan.
Plan out your work and work out your plan. Normally we don’tplan to fail, but we fail to plan.If you work on your financial plan, when yourfriends are partying and taking their girlfriends out, you will be definitelygoing to be retired richer than your friends.
The author is Ramalingam K, an MBA (Finance) andCertified Financial Planner. He isthe Founder and Director of HolisticInvestment Planners (www.holisticinvestment.in) a firm that offers Financial Planning andWealth Management. He can be reached at email@example.com.