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 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 a PAN card is very much useful in opening a bank account, a demat account, investing in mutual funds and the like. The required documents for getting a PAN card is a passport size photo, an address proof and 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 per annum for 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. 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 needs 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, 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 do not fall prey for unit-linked insurance plans, instead 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 per annum 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 your 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 balanceRs.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.
K. Ramalingam is a certified financial planner and the founder and director of Holistic Investment Planners. The opinions expressed here are the personal opinions of the author. NDTV is not responsible for the accuracy, completeness, suitability or validity of any information given here. All information is provided on an as-is basis. The information, facts or opinions appearing on the blog do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.
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 a PAN card is very much useful in opening a bank account, a demat account, investing in mutual funds and the like. The required documents for getting a PAN card is a passport size photo, an address proof and 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 per annum for 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. 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 needs 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, 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 do not fall prey for unit-linked insurance plans, instead 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 per annum 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 your 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 balanceRs.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.
K. Ramalingam is a certified financial planner and the founder and director of Holistic Investment Planners. The opinions expressed here are the personal opinions of the author. NDTV is not responsible for the accuracy, completeness, suitability or validity of any information given here. All information is provided on an as-is basis. The information, facts or opinions appearing on the blog do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.
