Basic Financial Plan

If you are a newbie in Financial planning and don't know how to shape your financial plan in right shape than here is the quick step wise financial plan for you. Kindly follow it's each and every step and your financial plan will be right in the nice shape. You actually don't need any financial knowledge for this nor you need to read and learn any complex things for it.

On our community, This is the commonest query. People want to do successful financial planning but don't know from where to start and that's why this 7 step basic financial plan is your starting point in the world of personal finance, financial planning and investments.


7 Step Basic Financial Plan


Step: 1 Buy a Pure Term Insurance Plan

Buy a pure term life insurance plan and cover your life adequately. Ideally it is advised to divide your life cover between 2-3 term insurance plans. Roughly you will need 8-10 times life cover than your annual income. So if your annual income is Rs.6 lakhs, you will need roughly Rs.50 lakh of ife cover. Many term insurance plans are available with riders. You may also buy a term insurance plan with riders. Riders in Term Insurance are of 5 basic types. Term insurance plan is usually for people who are married and have dependents (kid, parents and spouse). However, if you are single and don't have any dependents, no need to buy a term insurance plan and skip this step and proceed to next step. Once you get married and have dependents, fulfill this step.

1) Accidental Death Rider 2) Permanent and Partial Disability Rider 3) Critical illness Rider 4) Waiver of Premium Rider 5) Income Benefit Rider

Best Term Insurance Plans India


Step: 2 Get out of Junk Insurance Plans

Junk insurance policies are the unhealthy combination of insurance cum investment. The examples of junk insurance policies are - ULIPs,Pension Plans, Child Future Plans, Endowment Plans, Whole Life Insurance Plans, Money Back Insurance Plans and all the other type of insurance products where you get something on maturity. These financial products are the number 1 killer of your overall financial plan. So stop paying further premiums in these policies and get out of them immediately. Don't argue like - but I will just get 10% back, I will loose most of my money, the Surrender value is too less..etc.. Just get out of this garbage first. If you have never invested in any such financial products, skip this step.


Step: 3 Buy a Family Floater Health Insurance Plan

Buy a good family floater health insurance plan and cover all of your family members under it. If you are living in metro city of India (Mumbai, Pune, Hyderabad) than 5 lakh of cover will be good enough and if you are living in non-metro city than 3 lakh of cover will be enough. However, the more is better. You may also buy a Top-up health insurance plan and expand the cover of your health at an affordable premiums. It is also advisable to buy a good critical illness rider stand alone or with a health insurance or may be Accidental insurance plan. Here is the simple formula for it.

Health Insurance + Top-up health insurance plan + Critical illness Rider + Accidental Health Insurance

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Step: 4 Build Emergency Fund

You should have at least 3-6 months of your monthly expenses as an Emergency fund in your bank savings account or in Liquid Funds or Liquid Plus Funds. Emergency fund prevents liquidation of your long term investments during the time of any financial emergency like job loss, medical emergency...etc..


Step: 5 Start Systematic Investment Plan (SIP)

You should start SIP in 3-4 good Equity Diversified Mutual Funds with a time horizon of more than 10 years. This is the key step of your overall financial plan. This step will build a wealth for your long term financial goals like your own retirement and child's education and marriage and various other long term financial goals.You can expect 15-20% compounded annual returns from the equity funds. So Download the Compound Interest Calculator from the internet and play it with to decide your final monthly SIP to build certain wealth for your various long time horizon financial goals. Consider the Inflation while calculating your long term financial goals.

Best Mutual Funds India

The Principles of Mutual Fund Investing


Step: 6 Invest in Public Provident Fund (PPF) and Equity Linked Savings Scheme (ELSS) to Save Tax

PPF is the best tax saving instrument. ELSS is another good option. Invest in these financial products to save tax under Section 80C. You can also Save Tax Beyond 80C by using various financial products like Tax-saving infra bonds (Section 80CCF).


Step: 7 Getting Out of Debt

You can't accumulate enough wealth if you don't get out of debt. So try to repay and get out of all types of loans say - Credit card outstanding, Home loans, personal loans, car loans and any other type of loans.

Net Worth (Wealth) = What you own (Asset) - What you Owe (Liability)

So to increase your net worth, you will have to increase assets and reduce the liabilities. It is that simple. So now from your next pay raise, pay off your loan outstanding may be a part payment of your home loan or may be some other loan.

Also choose a Sound Financial Life. Nothing happens if you don't chose a sound financial life.

Understanding CTC and Your Salary Breakup

Whether you are joining your first job or changing jobs, it is important to understand the difference between Cost To Company (CTC) and take home salary. It will help you in better negotiation with the HR and structuring of the salary.

One of the most commonly used terms by companies, yet least understood by its employees is “Cost to Company” or CTC. The CTC, as quoted by employers and the take home pay are two different amounts. Also salary hikes in the form of an increased CTC doesn’t necessarily increase the monthly salary. So what exactly is this CTC and as an employee what all are you entitled for? This article aims to clarify the confusions that often arise in people’s minds when it comes to salary structures.

     

Demystifying Cost to Company

Ravi, a fresh software graduate, joined a top notch IT Company. For his first job, he was extremely happy with the total CTC of Rs 6,00,000. On the basis of this CTC, Ravi made lavish plans with his first month’s salary. Expensive gifts for family, a swanky new bike and the latest mobile phone. But with the first salary, he realized some of his plans had to wait. His take home salary was nowhere close to his estimation of his salary. He approached his HR, who then explained the breakup of his CTC, which he had just glanced over at the time of joining.

                      

The Cost to Company refers to the total expenditure a company would have to incur to employ you. It includes monetary and non-monetary benefits, such as monthly pay, training costs, accommodation, telephone, medical reimbursements or other expenses, borne by the company to keep you employed. The total CTC as need not be the actual salary in hand at the end of the month. It is simply a sum of various components put together.

               

Components of CTC

Companies, offer various attractive components in the CTC to retain and boost the morale of the employees. Where some salary components are fully taxable some are fully tax-exempt. The composition of your CTC and a few of its components could be grouped as below.

             

1) Fixed Salary – This is the major part of your CTC and forms part of your monthly take home. It commonly consists of:

                     

* Basic Salary: The actual pay you receive for rendering services to the company. This is a taxable amount.

* Dearness Allowance: A taxable amount, this is paid to compensate for the rising cost of living.

* House Rent Allowance (or HRA): Paid to meet expenses of renting a house. The least of the following is exempt from tax.

    * Actual HRA received

    * 50% of salary (basic + DA) if residing in a metropolitan city, or else 40%

    * The amount by which rent exceeds 1/10th of salary (basic + DA)

* Conveyance Allowance: Paid for daily commute expenses. Up to an amount of Rs 800 per month is exempt from tax.

               

2) Reimbursements - This is the portion of your CTC, paid as reimbursements through billed claims.

             

* Meal coupons: Many companies provide their employees with subsidized meal coupons in their cafeterias. Such costs incurred by companies in the form of subsidies are included in the CTC. Meal coupons are tax exempt provided it is not in the form of cash.

* Mobile/Telephone Bills: Telephone or mobile expenditure up to a certain limit is reimbursed by many companies through a billed claim, and is a taxable amount.

* Medical Reimbursements: Paid either monthly or yearly, for medicines and medical treatment. The entire amount is taxable. However, up to Rs 15,000 could be tax exempt, if bills are produced.

                   

3) Retirement Benefits - This is available to you only on retirement or resignation.



* Provident Fund: Employers contribute an equal 12% to the provident fund account. This employer’s contribution though received only on retirement or resignation, is an expense incurred by the company every month and thus is included in the CTC.

* Gratuity: Companies manage gratuity through a fund maintained by an insurance company. The payment towards the gratuity annually is sometimes shown in CTC.



4) Other Benefits and Perks

* LTC

 Leave Travel Allowance: It is the cost of travel anywhere in India for employees on leave. Tax exemption if allowed twice in a block of four calendar years.

* Medical allowance: Some companies offer medical care through health facilities for employees and their families. The cost of providing this benefit to the employee could also form part of CTC.

* Contribution to Insurance and Pension: Premiums paid by companies on behalf of employees for health, life insurance and Employees Pension Scheme, could form a part of the CTC.

* Miscellaneous Benefits: Other perks which companies include under CTC could be electricity, servant, furnishings, credit cards and housing.



5) Bonus: This is the benefit paid on satisfactory work performance for employee motivation. Though this amount is not assured to the employee, most companies include the maximum amount that can be paid as bonus, to the CTC. The two types of bonuses that are normally paid out are:

    

* Fixed Annual Bonus: Paid on the basis of employee performance, either monthly or in most cases annually, it is a fully taxable amount.

* Productivity Linked Variable Bonus: Complete bonus amount is paid only on 100% achievement of target, nevertheless it still is included as part of your CTC.

                    

Having understood what CTC is:

Each company too has its own way of calculating the cost to company. Let us revisit Ravi’s case. Ravi realized, that an attractive CTC does not necessarily indicate a heavy monthly take home. Benefits like training and development, whether undertaken by him or not was still considered part of his CTC. This is what he now feels.

                   

* One must take time to find out what the actual benefits are by asking for the break-up of the CTC so as to know the entitlement.

              

* If you are just joining the company, try to negotiate with the HR as to opting out of some facilities in exchange for increasing the take home.
            

Understand the expenditure limits and tax angle of perks and benefits, and use them smartly.