Set Financial Goals, For A Prosperous Tomorrow! (Free Press Journal 23 Sep 2012)

FORAM SHAH explains the importance of setting financial goals, with an outcome leads to abetter future.

Everyday we hear people around us saying “ Arre aaj market upar hai shares kharidne chahiye” ( the stock market has gone up and hence we should buy shares) or “ FD ka rate kitna badh gaya hai saare paise FD mein daalne chahiye” ( interest rates have gone up and hence should put money in Fixed Deposits) or that gold prices will increase and hence invest in gold now. But seldom do we ask ourselves why are we saving money? The obvious answer that comes to most of us is – for our future. Have we ever probed a little ahead and asked what is this future or when will the future come? Investing without knowing what we are saving for, leads to anxiety and hence at every increase or decrease in price/ rates we fall prey to the ‘ tips’ we get from our friends, relatives, colleagues. Most of us would react irrationally when it comes to our money. A friend of mine told me an incident where a person boarded a train from Churchgate station without knowing where he wanted to go. And thus at every station he would ask fellow travellers whether he should alight or continue his journey.

One would laugh at him thinking what a foolish person is he. But don’t we do the same with our money? We invest it without knowing our financial needs. Imagine this person had to go to Borivali.

He was atleast in the correct train.

Had his final destination been Dombivali, he was travelling in a wrong train altogether. One can imagine the hassles he will have to undergo to reach his destination.

( Churchgate, Borivali and Dombivali are stations on the western and central railway in Mumbai).

Someone may want to buy a laptop worth Rs. 40,000 for his son’s birthday two months away or accumulate Rs. 5 lakhs for daughters marriage or create a corpus for own retirement a decade away. These are simply nothing but the future events for which we save. In other words they are financial goals one wants to achieve.

Goals can be two months away, 2 years away or maybe a decade away. They are the destination one wants to reach. Defining goals is the first step to deciding where to invest. We understand how much money will be required and when.

Thus with every change in the market condition, there will be less apprehensions as the ultimate destination is known.

Very rarely do we find people who have listed down their financial goals. We always feel that it is at the back of our minds. We don’t realise the importance of actually writing them down. A person who has listed goal of taking parents for a pilgrimage after 8 months is less likely to spend a windfall gain, on any other thing. Thus defining goals also brings in focus.

Goals could be either responsibilities or dreams. While listing the goal if you feel that you have to do this – it becomes a responsibility. E. g. I have to provide for my child’s education.

Likewise if you feel that I wish to do this – it is your dream.

E. g. I wish to own a holiday home.

This exercise will enable you to prioritise among various goals and thus know which to postpone or which to not. We live in a dynamic world where “ Nothing is constant but change”. Our goals will also change with the change in life stage. Let me elaborate this with an example.

Mr. Malhar aged 25 approached us for financial planning. He was doing well in his job. He had already purchased a house by taking a loan. The main focus for him was to plan for his wedding and honeymoon. After his marriage, he was advised to undertake the exercise of goal setting with his wife.

Their combined goals changed and focus shifted to repayment of home loan, retirement, responsibility towards parents, buying a car and regular vacations. Life was running smoothly. Few years later when his wife was pregnant, their goals had to be revised to include corpus for child’s education and marriage.

Slowly the economic conditions changed and recession hit the market. Due to recession, Mr. Malhar had to face pay cut. He was still able to pay the EMI for the home loan. Most of his responsibilities were 10- 15 years away and hence there was no need to change the strategy. His near term goals of vacations and buying a car were affected. He was clear about the priorities assigned to goals and hence decided not to take a vacation or buy a car. These were postponed for a later date.

It is thus seen that goals should be revised with the change in life stage, birth/ death of family member, marriage, etc. Goals also need to be revisited during recession.

However in such case only the strategy to achieve the goals will change. Changes in economic conditions will lead to anxiety; however, one should keep in mind the duration after which the goal needs to be fulfilled before taking any corrective action. Finally to conclude, we all set goals for us in different walks of life so why not set our financial goals? 

Ms. Foram Shah is a Certified Financial Planner.

foramrs@ gmail. com

Ulips with health benefits are a costly affair (BS 25 Sep 2012)

YOGINI JOGLEKAR Wealth creation plus medical cover – the new theme of Tata AIA Life Insurance ‘Suraksha Kosh’ – tries to attract customers with twin covers through a unit-linked insurance plan (Ulip) and health benefits. But in its attempt to offer too many things, it ends up being more expensive, even if one were to buy both the covers separately. The premium of Tata AIA’s ‘Suraksha Kosh’, is ~25,000 for a40-year term. This product will pay a sum assured (SA) of ~10 lakh each for death benefit, critical illness and accidental benefit. Additionally, it also offers to pay a sum assured of ~3.5 lakh for surgical benefits. In total, it covers an individual for ~33.5 lakh, provided you pay the stipulated premium every year for 40 continuous years. Suresh Sadagopan of Ladder 7 Financial Advisory Services says such plans turn out to be expensive instead. “One should rather buy a pure protection plan and a medical policy, which will offer other benefits at a lower cost, too. If one wants to create wealth, investing in Ulips is not the only way.” One can save as much as up to ~10,000, if the benefits are bought separately from specialists. Taking a similar example mentioned above, one has to pay ~3,540 towards alife cover (for SA of ~30 lakh), ~3,052 for accidental benefit (for SA of ~25 lakh), ~2,809 for critical illness (for SA of ~10 lakh) and ~800 for surgical benefits (for SA of ~3 lakh). In total, one pays ~10,000 approximately for the same benefits with an equivalent or more sum assured/cover. There are others such as ICICI Prudential Life Insurance which has a similar product ‘ICICI Pru Health Saver’ which gives hospitalisation benefit as well. Whereas HDFC Life and Kotak Life Insurance are among few other life insurers who offer similar Ulips but benefits have to be bought in the form of a rider unlike in Tata AIA where the benefits are in-built. Also, HDFC’s ‘SL ProGrowth Super II’ doesn’t give surgical benefits. Some also offer waiver of premium and hospital cash. In other words, these are savings and wealth creating plans built on protection products. One has the option to choose from these plans. That is, death benefit remaining constant in such products, one can choose to combine it by adding one or all of these benefits (surgical, accidental and critical illness). These benefits in Tata AIA are in-built in the product and are not sold separately as riders. Suresh Mahalingam, managing director, Tata AIA Life, says, “Our new product gives people an opportunity to get the best from their investments on a marketlinked platform, without worrying about the risk of death, dismemberment and onslaught of medical exigency like a critical illness.” Experts say, investing in such wealth creating products has its flip side, too. They require a long-term commitment as compared to yearly renewals required in aterm and a medical policy. For instance, your Ulip policy gets lapsed, there are chances you will lose out on all the benefits you paid for in the previous years. However, the new rule now enables policyholders to revive a lapsed Ulip policy within two years from its premium due date. However, these policies offer a term, which is usually from 15 to 40 years and is available to individuals from the age 18 to 50 years with maximum maturity age of 65. Premiums paid under such plans are eligible for tax benefits under Section 80C, 80 D and 10(10D) of the Income Tax Act, 1961. Buy health and life policies separately

Investment ideas for the home maker (Yahoo.com : By BankBazaar.com | Strategic Moves – Wed 22 Aug, 2012 8:58 AM IST)

It is essential for women, be it working women or homemakers to keep themselves and their family financially secure. In the olden days, women generally had a habit of keeping savings in containers in their kitchen, but today that is not going to get our savings anywhere when confronted with ever-growing inflation. It is wise to choose to invest and wiser to choose the best investment in order to keep our family and ourselves financially secure. A good investment gives you better returns than merely saving in a bank deposit or in our piggy bank and helps us to cope up with inflationary pressures.

Homemaker and Investments?

Not a good combination, most people would say. Many people think homemakers make very bad investors, as they do not have knowledge about the share markets and the technical aspects of investing. That's completely false notion. Looking from a fundamental analysis point of view, they are the ones who could be good investors as they make all purchase decisions for the entire family and they are aware which company performs better for what reason.

They may not have to make a decision by looking at the balance sheet of the company; they are the main consumers of most of the products around. This is a strength, which can help them analyze stocks and invest in shares and equity. They are uniquely qualified to buy and sell shares.

How does a homemaker choose appropriate investment options?

The best way to plan your investment is to know your goals. Try to take a piece of paper and write down what you would like to achieve in your life time, you might want to have a house of your own, probably a luxurious car, a world tour etc. These are your long-term goals.

There may be a few other things that you need to achieve in the next two to three years or more, for example higher studies, marriage, purchase a two wheeler etc., these are your short term goals. Remember, your short term goals keep changing as you move on in your life. Your short-term goals today are not going to be the same when you become a mother. The article discusses in detail about the investment options for homemakers at different stages of life.

Where to invest in your 20s

In your 20s, you are likely to be in your college or at your first job, so your income is definitely going to be very less. You can choose to invest them in a recurring saving deposit or bank deposits where you can earn low but regular and fixed returns. You can also choose to invest your money in mutual funds because the risk involved is lesser and you can invest very small amounts of money. Once you have started earning good money in your late 20s you can start investing your money in equities where the risk and returns are higher.

Where to invest in your 30s

In your 30s as homemakers, you might not have plenty of money to invest in, but make sure you have a term insurance for yourselves and your family. A health insurance will help keep you more secure during times of emergency. Try to cut down unwanted expenses and invest in education funds for your childrens' higher education, take up a suitable retirement plan for yourselves and your spouse. Avoid endowment plans; they carry higher charges and may not give high returns.

Avoid buying gold ornaments, they are only going to eat away your money in the form of wastage and making charges. Instead, invest in gold-based funds and buy gold in the form of coins/bars.

Where to invest in your 40s

In your 40s, you need to boost your children's education and wedding investments and your investment for retirement. If you are planning to build a house for 1500 Square feet, take only 1000 Square feet for your accommodation, rent the 500sq feet space, and use the money for investments. You can also take in a paying guest and use the rental and food charges for your short-term investments avenues.

Where to invest in your 50s

In your 50s you should invest in risk free investments. If you need to withdraw your long-term investment for your son's higher education, withdraw it or switch it to a debt fund at least a year before he gets the admission. Do not wait until the last minute, as you will be at risk if there is a sudden fall in the market.

In the 60s and beyond

Transfer the amount of money you have into bank deposits or into a recurring deposit (RD) so that you will receive good returns and your money will be safe. Avoid risky investments in your 60s.