Personal Finance News, Investment

Financial Planning



What is Financial Planning?
Financial Planning is the process of meeting your life goals through the proper management of your finances. It involves the process of assessing your financial situation, determining your objectives and formulating a plan to achieve them. The objective of financial planning is to ensure that the right amount of money is available in the right hands at the right point in the future to achieve an individual's life goals. It also allows you to understand how each financial decision you make affects other areas of your finances.

Insurance




Adequacy of Protection/Life Cover

We do not think (or do not want to think) of what will happen to our family, if we are gone - especially when we have not met all of life's responsibilities. Though the family goes through emotional trauma, financial burden adds to the pain. One has no remedy for the emotional pain, but smart financial planning can certainly ease the financial pain.

If one is under insured, it could lead to a slip in family's lifestyle in case of an unfortunate death of the breadwinner. The family may have to compromise on various fronts to make the ends meet. These could include cutting down household expenses like food, medical, entertainment expenses, marriage expenses of children or moving to lower grade school for your children and many more expenses.

While life insurance is critical to meet financial responsibilities, adequate insurance cover is the key for meeting your responsibilities. So having a cover is not enough - having adequate cover is critical. Also, investment planning is not enough because plan could work only if funding the plan is regular and enough wealth is built up to take care of all life stages responsibilities. What happens if the funding suddenly stops?

Life insurance has moved from protecting life to protecting lifestyle. Financial needs can be classified broadly into following two categories.

* Protection: if anything happens to the breadwinner, the family continues to be financially protected and maintain the same life style.
* Savings: one should be able to generate required corpus to meet milestones such as education / marriage expenses of children, buying a house etc.

The first step in buying insurance cover (Life Protection cover) is to adequately assess your need and responsibilities. One should ask the following questions:

* What is my life stage? (Age, family etc.)
* What are my responsibilities? (Buying a house, children's education / marriage expenses, protecting my income etc.)
* How much corpus I require to meet the above financial responsibilities?
* What is my current corpus / net worth?
* What are my liabilities (like car loan / housing loan etc)
* How do I plan (including selection of insurance plan) so that even if I am not around, my family can still sail through milestones?

The above data can be compiled in the following Protection Cover Computation Table to assess whether you are adequately protected:

A. Expenses protection
» Household expenses of family members

B. Goal protection» Education expenses of children
» Marriage expenses of children

C. Liabilities protection
» Outstanding Housing Loan
» Outstanding Car Loan
» Any other Loan (Personal Loan)

Total funds needed to cover expenses: (A + B + C)

D. Less: Existing Cover (if any)

E. Less: Current Assets / Investments (excluding assets for self consumption like house, car etc)

Additional cover required to be purchased = (A + B + C) - (D + E)

Mediclaim Policies: Clearing Cobwebs

Mediclaim provides for reimbursement of expenses incurred for hospitalization for certain injuries, illnesses, and/or diseases. It not only covers the expenses incurred during hospitalization but also the pre and post-hospitalization expenses. Then there is facility of cashless settlement, which enables the individual to get admission in any hospital without any initial payment. However while choosing policies many individuals find comparisons of products difficult due to confusing terms and myths. I have tried to clarify a few.

Floater Policies

These cover two or more members of the family in a single policy while offering a discount on the combined premium .The family is covered for one single sum s with no upper limits per member. The discount in these is a great attraction but can leave you under insured. The risk in floaters comes when all family members fall ill at the same time. Floater policies give an impression of a high cover, but may not necessarily be a good product. It is preferable if each family member has a separate cover. To give you an example, Mr. Ramesh Rajan has a floating cover that covers self spouse and both parents for a sum of 5 lakhs. Looks like a decent cover on the face of it. Now the family meets with a road accident in which all four were injured. Ramesh's father has major fractures and his medical bill comes to over 4 lakhs. The other three incur an expense of 1 lakhs each. Total Medical bill comes to Rs.8 lakhs. Unfortunately the whole family will only get 5 lakhs of bills reimbursed. This would not have been the case if each were covered for a sum of Rs. 5 lakhs each. Even a lesser cover of Rs.3 lakhs each would have covered them better. (An out of pocket expense of only 1 lakh as compared to 3 lakhs with the floater scheme).

Estate Planning




Will or Trust?

The assets of someone who dies without a Will or a Trust is disposed of by operation of law, which may not be according to the wishes of the deceased person. Estate planning is a process of arranging and planning your succession for management and distribution of your wealth in a systematic and pre-determined manner to your heirs and to other beneficiaries. The most common vehicles for this purpose are the drafting of Wills and setting up of Trusts. Estate may include any movable and or immovable property like equity shares, bonds, deposits, jewellery, cash, bank balance etc that then gets passed on to the next generation. In order to make the optimum use of wealth created over a period of time and to protect it for the near and dear one's it becomes crucial to plan. Both wills and trusts are designed to do the same thing - to pass on assets at death. Both can be very effective, but they use different methods to do it. Wills and trusts are essentially two different tools that accomplish the same goals. Deciding which tool is better for you depends on personal situation. What is right for one person might be very wrong for another person. Therefore, you need to fully understand these differences in order to decide which method is better under your circumstances. Many assume that they only need a simple will to best take care of their affairs when they pass away, and that only the wealthy need to have a trust.

Estate planning through Trust involves much more than merely making a Will. Trust is effective not only during the lifetime but also after death. Estate Planning through a trust route is one of the most reliable ways to assure that your assets will be managed for your family and loves ones as you had intended. In Estate Planning through Trust route, the person who owns the estate sets up a Trust, appoints trustees to manage the trust, transfers his estate to the trustees and names the beneficiaries of the trust.

There are certain advantages on why one should opt for a Trust over Will:

* The primary disadvantage of a Will over is that it can be disputed after the death of a person making the Will. Even the best-drafted Wills can be challenged. Also, mental soundness of a person making the Will can be challenged in the court of law. Disposition of assets through Trust ensures passing on assets without causing any untoward problems for your heirs.
* Will is a legal declaration of your desire to distribute property during the lifetime of a person but intended to take effect after his death. Trust involves transfer of your estate to a trustee for the advantage of certain beneficiaries while you are alive. Trust leads to efficient management of your estate during and after your death.
* A trust is not subject to probate and can be kept confidential, whereas a Will becomes public document once probated.
* A Trust saves some Probate Court expenses.
* Probate is a sometimes a big hassle for survivors. There are numerous filings and notices, and sometimes delays occasioned by the necessity of getting Court approval for so many things.

How I learned to control my money




1. Stop spending

There is always a loophole when it comes to my personal finances. No matter how much I budget, plan, or willpower I put forth, there is always somewhere that an extra large chunk of change goes. In my ever changing efforts to find a way to trim off those extra expenses I came upon something that worked wonders for me. I hate writing, especially checks. I have never enjoyed writing checks and I hate to have to write down the amount that I am spending because it forces me to think about every penny that I am getting rid of. Since I hate writing checks, I turned that around to my benefit by not using a debit card at all (I kept mine at home for months) and not carrying cash. I had to write checks all the time, and since I didn’t like writing checks I started writing fewer and fewer checks. I found something that I disliked more than how spending the money made me feel better. I instantly found that I had more money at the end of the month and it wasn’t for lack of trying.

Change happens when the positive stressor outweighs the negative stressor. I have been able to use this idea in other areas of my life as well. I flip flopped this idea to my advantage by finding a large negative stressor to prevent me from spending money. When you understand what you want to change, you can manipulate the positive and negative stressors so that you will choose the desired outcome with less effort than you thought.

2. Practice Saving

Before I went to college I decided that I was going to give myself a good gift when I graduated. What I decided to do was to get a large piggy bank (a 3 foot tall coca cola bottle in my case) and put all my change in it while I was in school. I did just that, all my change went into this piggy bank and I made myself never spend any of the money in it, just leave it there and watch it grow. When I finished college I took my piggy bank which now weighed over 20 pounds of mixed change to the bank. I ended up with $330 to go buy myself a gift. Now if your fresh out of college and used to getting by with very little, that is a lot of money. The lesson to get out of this was that I had a plan with a reward for completing my plan, and it was a realistic plan and reward. By having a plan and a realistic reward, I motivate myself to accomplish my goals.

3. Budget for Fun

It can be very frustrating and depressing sometimes when you are on a tight budget and having to spend all your extra cash just to get by. What I did to make myself stay on track more often was something I did as a kid. I gave myself an allowance and that money was just for me and I added it into my budget. That money was just for whatever I felt like with no guilt or strings attached. This really helped me to separate taking care of my financial situation and being able to actually have a life as well. I started off with trying a few different methods and ended up deciding a weekly allowance was better since this was a short term focused amount of money, it just made more sense to have it for a short term. Giving myself an allowance made things almost instantly better for me because all the weight was off my shoulders for every purchase. Instead of having my entire bank account to deal with and thinking through all of my bills and cash flow before a purchase, I had $25 dollars to waste on whatever this week and that was all that I had to think about.

I didn’t do all three of these things at the same time, I did one thing til I learned how to control myself and my situations that I put myself into. When I spent too much money, I turned to checks for control. When I was depressed for not having any to spend on myself, I gave myself an allowance. The whole time I was saving my change because saving through it all was an investment in myself and my future that I can turn into saving plenty for retirement and things to come.

The Myth of the Rational Market

In "The Myth of the Rational Market" Justin Fox traces the history of the development of various theories about how financial markets work, how efficient (or not) they are and the applications of those theories to investment management.

From a historical perspective, the book was a great read.

In terms of conclusions, Fox ends up supporting the notion that markets are quite efficient in distributing information but that neither market participants as individuals nor market participants as a whole are entirely rational. This conclusion is at odds with a lot of the popular academic theories such as the efficient market hypothesis as well as the logic of game theory. It is also well supported by argument and evidence.

Fox makes a clear distinction (which is often missing from (or glossed over) other writings on the subject) between the efficiency of markets and their rationality.

Fox covers issues like the inability of active fund managers to "beat the market", the case for hyper rational investors (like Buffett) to do so and makes some very accurate condemnations of Alan Greenspan (and other market regulators) for facilitating the economic (and regulatory) conditions which precipitated the credit crisis.

Fox also deserves praise for writing in terms which are easy for a lay person to follow and avoiding the trap of getting bogged down on technical issues.