Let me start my article on a piece of profound advice I received from Scott Adams (of the Dilbert cartoon fame) many years back. It’s a simple one-page financial plan which almost all of us can follow, but don’t follow.
Scott Adam’s 87 words Financial Plan
Though it is said in the context of Americans and I may not agree with everything he said, as things are a bit different in India. But broadly, it works.
Recently, I read a similar 100 word financial Plan by another fellow financial advisor which made sense to me and is quite relevant for Indian savers and investors.
The 100 Word Financial Plan by Amar Pandit (Happyness Factory)
- 6-12 months of Contingency Funds.
- 20-40X of your Annual Income -Term Plan.
- Insure your Health and Assets.
- First Save 25% of your Income and then Spend Guilt-Free.
- Set Financial Goals and Prioritize.
- Start Small with 5% if you can’t save more but Start Now.
- Minimum 50% of your Assets to be invested in Diversified Equity Funds (Long Term Money only).
- Rebalance your Asset Allocation once a year.
- Ensure Nomination on All Assets.
- Create your Power of Attorney and Will.
- Get out of Compounding’s Way.
- Stop Reading or watching the News. Read Good Books instead.
- Be Positive about India and the world.
P.S. (Yes and Drink that Starbucks Coffee if you like it)
Sadly, this remains only on paper, and very few investors and even advisors follow this. I won’t blame it entirely on you (the investor.) After spending 16 years in the financial services industry, I can confidently say the industry and the media is equally to be blamed as they have made the entire thing look so complicated for their own vested interest that we miss the simple message and this is what the legendary fund manager Late Parag Parikh has always echoed.
It’s only in 2017 that the mutual fund industry after 25 years of their existence and with a plethora of complicated products and communication came out with a simple campaign called “Mutual Funds Sahi Hai” that has struck a chord with the retail investors resulting in the massive SIP wave
Life Insurance industry too realised they need to respond fast and they came out with a counter-campaign which resulted into the tagline “Sabse Pehle Insurance”, and for the first time we are seeing even insurance industry has started pushing Term plans aggressively (the only life insurance policy one should ever buy).
So why managing our money should be a simple affair?
Confucius once said: Life is really simple. But we insist on making it complicated.
Since I am a big fan of Steve Jobs, his philosophy on focus and simplicity has always stuck with me. He said “That’s been one of my mantras – focus & simplicity. Simple can be harder than complex. You have to work hard to get your thinking clean to make it simple but it’s worth it in the end because once you get there, you can move mountains”.
Even a genius like Albert Einstein has created a superb framework on five levels of intellect and simplicity is right there on the top.
So what should an investor do? And how I have done it over the years?
I have listed below the components of financial planning that one can easily implement.
Let me take you through my family’s financial plan.
Credit cards and loans: I have never taken a single loan in my life and have always paid my credit card bills in time (Banks hate me for this).
Protection for my family
Life insurance : I have only Term insurance plans which mean if something were to happen to me, my nominees would get the Sum Assured (Life Insurance companies hate me for this).
Personal accidental cover : Since my work involves a lot of travel, I believe it’s a good idea to have a Personal Accidental Cover. What if I meet with an accident resulting in a temporary / permanent disability.
Critical illness cover : Today, our lifestyle is very erratic, and many of us might have some critical illness like cardiac surgery, cancer, kidney ailment etc in the late 40’s or 50s. Because of this, it can have a severe impact on my working capacity and to protect my future income, critical illness cover can play an essential role in the interim.
Health insurance cover : I have a Rs 42 lakhs floater health insurance company for my family, hence I don’t have to worry about any hospital-related expenses as and when they arise.
You would have observed I have tried to cover myself and my family from all sorts of financial risks arising out of any unforeseen health-related events. This is the first step that every individual must do. The early, the better. Risks always come unannounced.
I believe in the philosophy of savings first and spending later. I try to keep some money in my debt funds for my emergency requirements or short term goals like vacation planning, buying of an expensive consumer durable item etc.
My first primary long term goal is to become One Idiot i.e. try an achieve a corpus of Rs 100 crs before I turn 50. Within this over-arching goal, there are many financial goals embedded in the same like the purchase of a house, a Rolls-Royce car, children’s higher education / marriage, charity etc.
All my long term assets are in equity mutual funds, NPS (National Pension Scheme) and a PMS (Portfolio Management Scheme) fund. I don’t dabble in stocks since I don’t have time to do research on my own. I am an aggressive investor and I understand market cycles because of my 16 years of experience and hence I am in for a very long haul. My synopsis of the current family’s portfolio is shown on the home page of www.oneidiot.in
Making a will
I have a simple Will in place and all my nominations are also up to date and in line with the Will.
Keeping the family involved
I have seen most investors don’t keep their family members involved in their financial plan (ironically, they are doing it for their family only). I keep my family in the loop. From time to time, I explain my children (age 11 and 9) about the things that I have been doing so that they understand basic financial concepts earlier in their life. I have also shared the details of my digital assets with them like email accounts, banking user ids and passwords. I try to keep my correspondence address, email ids and mobile number in all my investments updated so that I / my family can receive regular communications from the various service providers.
Review it once a year
I know many investors who look at their portfolio on an hourly, daily, monthly basis. Remember, the more you see, the less you get. Reviewing your financial plan once a year is more than enough or if there has been a major change in your circumstances (losing a job, getting a windfall etc) then one can review it accordingly.
Hire a good advisor if required
I have observed most people from the financial services industry thinks they know it all and hence believe in DIY (Do it Yourself) but unfortunately in maximum cases, they are the most vulnerable because of their over-confidence. Just like many doctors don’t perform critical surgeries on their immediate family members, similarly, most advisors / industry professionals should have a good financial advisor to guide them on their personal financial matters.
I know of an upcoming financial advisor who has still not taken a term plan and he is the only breadwinner in the family. Quite surprising. Since we have five financial advisors within the family and because we keep discussing and reviewing our financial plan from time to time, I have not sought the help of another financial advisor and also since my goal of becoming One Idiot is very clear, I just let my discipline and patience do the work. However, I know a few good advisors who are advised by other professional financial advisors when it comes to their personal finance.
In a nutshell, I have tried to lay out my personal financial plan in as simple words as possible and hope this will guide and motivate you to embrace simplicity when it comes to money. Always remember, the simple you keep your financial affairs, the wealthy you will become in the long term. And it comes with a lot of peace of mind too.
Hope the financial services industry is listening.
P.S – I hope you find this article insightful and take some actionable points where you are finding the missing gaps. Pls mention your experience in the comments section and if you have any queries, I will be happy to answer them. Also, kindly share the same within your family / friends so that they may benefit it too from our collective experience.
Disclaimer: The views outlined in the blog are solely personal and I may be biased towards certain investments since I invest my own money there. Pls use your own discretion and consult your financial advisor before investing.
Conflict of Interest: I run my own financial planning & wealth management firm by the name Etica Wealth Management (P) Ltd and hence at times I may have vested / conflict of interest while presenting my views.