Resolution for 2018: Be Healthy & Wealthy

2018 is almost here and we already have a plethora of plans and resolutions that we wish to accomplish. Considering that the New Year is the most motivating time to start with some new decisions which can change our life for the better, one excellent way to do it is by making some solid resolutions which can help us to be healthy and wealthy the two most important part of life. We can learn the good habits for healthy life and use them for a financial wealthy life as well.  Let’s chalked down the good habits for a healthy life and how can we learn from them to also have a wealthy life.

1.  Get up early in the Morning: Start Investing Early in Life

One very significant benefit of waking up early is reduced stress level. When we rise early, it eliminates the need to rush in the morning. We can then start your day on an optimistic note and such positivity often stays with you throughout the day. Early risers often go to bed early.

Similarly starting the investments early allows us to develop disciplined spending habits by focusing on budget and cutting expenses when needed. It gives more time to grow our investments and we get the amazing benefits due to power of compounding. Let’s understand it by an example: Ram starts saving Rs. 5000/- monthly at the age of 25 will get approx. 2.76 crs. At the age of 60. While Shyam who starts saving Rs. 5000/- at the age of 35 will get only 94 lakhs when he reached 60.

2. Have Balanced Diet: Diversify the Assets

A well-balanced diet provides important vitamins, minerals, and nutrients to keep the body and mind strong and healthy. Eating well can also help ward off numerous diseases and health complications, as well as help maintain a healthy body weight, provide energy, allow better sleep, and improve brain function.

Similarly we should diversify our capital across different investments to reduce your overall investment risk. This strategy is designed to help reduce the volatility of investment portfolio over time. For example a single scheme of mutual fund invests in 20-30 stocks and provides the needed diversification in a single investment.

3. Exercise Regularly: Invest Regularly

Regular exercise helps us to Control Your Weight, reduce the Risk of Cardiovascular Disease and Type 2 Diabetes and Metabolic Syndrome.  It also helps in reducing certain type of Reduce Cancers as well as it Strengthen our Bones and Muscles. Exercise also improves our Mental Health and Mood.

Trying to pick the top or bottom of markets is notoriously difficult, by making regular investments we can avoid timing the market. Regular investing helps to ensure that we don’t miss out on the best gains. Regular investments also helps to reduce the impact of periods of short-term volatility and gives our money the time it needs to grow, as markets will generally increase over the long term.

4. Drink enough Water: Have enough Liquidity

One of the best things we should do after waking up in the morning is to drink at least 500 ml of water. Water fires up our metabolism, hydrates and helps our body to flush out toxins. It gives our brain fuel, Improves Skin Complexion, Boosts Immune System and may even make us eat less.

Similarly we should have sufficient liquid assets. Liquid Assets are low-risk investment which can be converted to cash quickly and easily with little or no penalty. Examples of liquid assets are Treasury bills, savings accounts and money-market/liquid mutual funds. Flexibility and accessibility are just two of the ways liquid assets can help you stay ahead in the financial game. Liquidity is important. In case of emergency It is a safety net for us and our family.

5. Have Enough Sleep: Have enough Risk Cover

Adequate sleep is a key part of a healthy lifestyle, and can benefit our heart, weight, mind, and more. Sleep makes us feel better, but its importance goes way beyond just boosting mood or banishing under-eye circles. Sleep plays an important role in our physical health. For example, sleep is involved in healing and repair of our heart and blood vessels. Ongoing sleep deficiency is linked to an increased risk of heart disease, kidney disease, high blood pressure, diabetes, and stroke.

We should always have proper risk cover to face the uncertainties of life like health issues, loss of income, fire or theft at home etc. We should take proper Health insurance, life cover and also insure our valuable assets from the risks. By having proper risk cover we can have a much tension free life without bothering much for the uncertainties of life and can take also take some calculated risks in life.

6. Don’t diagnose yourself: Take Professional Help for analysing

In this day and age of limited time with doctors coupled with ample opportunity to google anything, the temptation for people to reach their own conclusions about their illness is strong. When we self-diagnose, we are essentially assuming that we know the subtleties that diagnosis constitutes. This can be very dangerous, as people who assume that they can surmise what is going on with themselves may miss the nuances of diagnosis. Another danger of self-diagnosis is that we may think that there is more wrong with us than there actually is. Then there is the fact that we can know and see ourselves, but sometimes, we need a mirror to see ourselves more clearly. The doctor is that mirror. To be fit and healthy we should always take Doctor’s guidance to know the exact problem and the right solution to cure it.

Similarly a Financial advisor examines an individual’s financial situation and health. He may pinpoint weak points that need strengthening. For example, the advisor may alert you about wasteful expenditure. He may identify investments that are not giving optimal returns. With the help of the advisor, we can chart out our financial goals–even the improbable and ambitious ones. The advisor can then help you create a plan to achieve these targets. He may suggest that you split your goals into short-term, medium-term, and long-term goals. This allows for better financial management. The advisor can recommend products to help you reach your goals faster. In this, the advisor would assess the risk profile, personality, and financial responsibilities. He would also explain the product features and suggest how to make the investments.

Managing your personal finances is not rocket science. People have been doing it for years with success. But it is all a matter of trial and experience. Choosing the right financial advisor is crucial to the success of any financial plan.

7. Periodic Reports & Regular visits to Doctor: Periodic review & regular interaction with advisor

Our health is our greatest treasure. Taking care of our health is utmost important. But in our daily life, we keep on looking for excuses to not visit our doctor. Be it for saving money or for other reasons like ‘I am too young and healthy to go to a doc’, ‘I don’t have time today; may be next week, I’ll get an appointment…”, we keep on ignoring our health. We ignore the fact that performing regular health check –ups from young age can actually reduce the risk of occurrence of several health issues in future.

Similarly we should have regular interaction with our financial advisor. Given the ever changing economic landscape, it is prudent to keep in touch with your financial advisor at least once in six months. This communication can take the form of a telephone call, an e-mail, text or meeting to discuss our current financial situation and any changes in our goals and needs. It is also important to have a face-to-face meeting at least once a year, or upon the event of any major significant changes in our or family’s life such as birth, marriage, divorce, death, inheritance, sale of house, purchase of house, change of job, loss of job, illness, pending retirement, or reaching Medicare age etc. Topics of discussion could include subjects such as tax situation, financial evaluation and estate planning, structure of portfolio, total assets, current and future growth or earnings, non-market related assets such as a private company or real estate.

7. Have qualified family Doctor: Have qualified & Certified Financial Planner

We should have a good doctor who is learned, honest, kind, humble, enthusiastic, optimistic, and efficient. He or she inspires total confidence in patients and develop a good relationship that by itself constitutes good treatment for any kind of ailment and the best starting point for confronting all causes of pain and suffering.

Similarly we should have a good and well qualified Financial Advisor who understand our requirements and also qualified to advise to client’s best interest in mind and can help in sorting out the income, expenses, needs, wants and financial ambitions as required for a person and his family.

If we follow these basic principles in life we may stay healthy & wealthy and live life peacefully.

Basic Rules of Personal Finance

For some people, getting personal finances in order is most difficult part of their life. However there are few basics and if we follow them properly it can make our financial life easy and systematically. Let’s discuss these basic commandments and understand their implications in our life.

1. Not just read but take Action

We keep on reading various articles about personal finance however just jeading about how to improve your personal finances will not work unless we take the action of putting what we learn into motion. Before we can get anywhere with our personal finances, we need to begin and the best time is-- right now. If we are reading this article, we know that we should be taking steps to get our personal finances in order.

First thing we should do is to take a print out of this list and place it where we can see it every day, so that it reminds us that personal finance is a priority in my life and that I shall take some action each and every day to try to improve it.

2. Credit Cards are costliest loan so clear it first

Credit card company’s charges interest rates between 3-4% monthly compounding which comes to 40-50% annualized. This is the costliest loan ever. In many cases people just pay the minimum due amount and that results into a debt trap. This is the number one enemy to our personal finances. It can have a huge negative effect if we don’t pay our credit card bills fully every single month. Make this a top priority.

3. Keep the Cashflow positive

It is simple math that our cash inflows should be higher than cash outflows. If we want to keep our personal finances in order, we should live on less money than we make. That means either our total expenses for goods and services we use should be less than our current income, or we should find out a way to increase our income so that we can spend more, but still less than what we make. Either of these is perfectly fine.

We should create a budget and track our expenses to see where we are spending and how it fares vis-a vis our income. If we are spending more than we make, we need to decide whether to curb unnecessary expenses or figure out how to increase the income.

4. Wants and Needs! They are different

We need to understand the difference between wants and needs yes they are different and must be differentiated to keep our personal finances in order. Yes we can spend some amount in small luxuries, however it should be in budget and after meeting the essentials.  It is very important to realize that wants are not needs. If we understand the difference and control our spending’s our finances will be in much better shape.

5. Pay Ourself First

Keeping specific amount for our future/emergency needs is a must. So before we start spending money on other expenses we should pay our self a minimum of 15-20% of take-home pay. This money is not part of monthly spending budget but saved for future goals/emergencies. A direct debit from bank account to liquid funds could be a good starting option for that.

6. Have Specified Financial Goals

We should have specified financial goals as per our requirements In order to reach them. Every person has their life style and priorities hence specific goals, so we should understand and decide our specific financial goals and when we want to achieve them. Based on these goals steps need to be taken to reach them.

7. Save and Invest

The money taken out (as mentioned in point no. 5 that you pay yourself) should be invested properly so as to make it grow and work for us in the future.

As mentioned in point no. 2 If we are carrying credit card debt, invest in (pay) it first. We should also make sure to take full advantage of various tax saving and investing opportunities that are available. Build retirement corpus and make sure to have an emergency fund.

8. Be Responsible for our Decisions

All of us cannot be expert on finance and investments and may feel it more convenient to hand over all our money matters to somebody else. However we should have the final say in all decisions about our money. We may seek out advice and get opinions on our finances, but in the end it is my money hence our responsibility. Remember we are the only one who is going to truly look after our own interests.

9. Protect the Assets

Life is uncertain and beyond our controls hence we should take all the necessary steps, usually through insurance, to make sure that our assets are protected in case of a disaster.

Take the time to check and ensure that all assets are properly insured, and re-evaluate this every few years or whenever a major life change occurs, such as marriage or a new addition to the family. Also be sure to compare insurance rates on a regular basis, since this is a competitive business.

10. Contribute to the Society

We may be not very rich but there are a lot of people that are far worse off than us in the world. It's important to nurture a sense of giving and to be thankful for the small things that we have. That means donating to worthy causes on a regular basis.

We can select a few causes that we believe in, and give to them generously. It’s not just money that we can give. Volunteering time and skills are also appreciated by most charitable organizations. 

Insurance: Are you covering Risk or just saving Tax?

Almost all of us have insurance policies, many of us have actually multiple policies, mostly sold by someone known to us. But do we really know whether we actually need them and how much risk cover we are having?

We should keep in mind that an insurance policy is supposed to protect one against a financial loss in the event of a casualty or untoward event. In the case of life insurance policies, such an event is the untimely death of an earning member of the family, resulting in loss of future income. The best way to buy protection against such financial loss is to buy an insurance policy for an earning member of the family such that the risk cover (or sum assured) is as high as possible for the lowest amount of premium payable.

Most of the policy holders do not know the amount of life insurance cover they have but they know exactly how much premium they pay each year and also insurance agents generally push more on investment based insurance products rather than pure risk cover products. Why is it so, let’s understand it?

1. According to the accounting principles followed by the Insurance Sector, the premium collected by an insurer is booked as its income, while the risk covered is the firm’s liability. A pure term plan is a policy that gives the least income to the insurance company, while creating the highest liability. Hence, it really does make good business sense for insurance companies to sell investment-linked insurance policies, to shore up their income. 

2. Since income is the main criterion, insurers fix sales agents target based on premium collected rather than total risk covered. This leads to the agents to sell those policies where higher premium can be collected.

3. The seller’s commission is linked to the premium and not the cover. Therefor pure insurance policies tend to lose out to investment-cum-insurance products in sales.

4. The Income tax deduction under section 80C is linked to the premium paid and not the risk cover. Therefore investors also focus more on the premium amount and how much they will save on tax rather than the risk cover.

5. The normal human psychology is to get something when we are paying for it. In pure term insurance policy a policy holder do not get anything if he survives over the tenure of the policy which makes it unattractive. But we should compare it with mediclaim or vehicle insurance where we don’t get anything if there is no claim.  In case of life insurance policy why we always want something. Read my earlier post Mutual Fund + Term Insurance: Best of both Worlds for to understand that how term insurance and mutual funds can give much higher returns as compared to traditional policies.

The most suitable policy for providing such protection is a pure term plan. Whenever a person tries to sell an insurance policy, we should ask for a comparison of features and costs across the various options available. The first step in buying insurance cover is to calculate one’s need. The next step is to find which insurance policy would serve the purpose.

As for tax planning, many options besides insurance are available. If we want to take risk, invest in an equity-linked savings scheme. If we do not want to take risks, there are longer-term bank fixed deposits, NSC, PPF, SSY etc.  which come under Section 80C. Certain expenses like: Children’s tuition fees, the principal repayment part of the home loan EMI, etc. are also eligible for Section 80C benefits:

We should always remember: As a life insurance buyer, our primary need is to get a risk cover. Focus on that. That will save us from mis-selling, too.