As I read through the pages and pages of questions from viewers sent by my producer for the weekly show that Mint does with NDTV, one distinct pattern emerges. Most people have the makings of a financial plan, but are simply unsure of how to proceed. Going to the next step means knowing that so far is so good. “Am I doing OK?” is possibly the question most often asked at the end of viewers’ mail. Each person is different and each piece of advice I give is customized to a particular situation. But are there some basic running rules that we can still distil out that are not purely theoretical and take into account the fact that we live very complicated lives with little time for nuanced attention to different parts of our lives?
The answer lies in building a grid that is robust and then allowing it to play out. Your job is to keep the fantastic stories of multiplier returns and land deals of your peer group from pushing you to make rash moves. If we can do this—keep our own expectations in check; there is a set of rules that will ensure basic financial hygiene. You’re doing OK if you are doing the following things.
You’re doing OK if you are getting a full 12% of your basic deducted towards your Employees’ Provident Fund. This ensures that the employer is pulling in 12% as well into your retirement fund. One calculation says that somebody who begins work in early 20s at Rs20,000 a month salary and sees a 10% increment each year, will end his career at 60 years of age with a provident fund (PF) corpus of Rs2.6 crore. Most of us have fragmented earning lives due to job changes or breaks in career (specially true for women) and don’t allow PF to build up. To get the best of this tax-free government largesse, just don’t break your PF thread. Don’t withdraw, allow it to grow. In addition, if you are contributing the full Rs70,000 to your PPF account each year and not dipping into it, you’re are doing fine.
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You’re doing OK if you have a pure life insurance cover that gives between Rs25 lakh and Rs2 crore to your family in your absence. An income of Rs12 lakh a year will usually need about Rs50-70 lakh as cover. Keep adding cover for the loans you take. You’re doing OK if you top up your office mediclaim with individual policies for self and spouse. Or if there is no office cover, individual policies for the family topped with a floater. You’re doing OK if a household insurance policy covers the house and its contents.
You’re doing OK if the house in which you live is fully owned or there is a property that is in your name. In addition, if you decide to take a loan and buy another property as another real estate investment, the math becomes a bit more complicated. It will work if the rent you get covers about half the equated monthly instalment (EMI). It will work if the EMI can be covered easily by one income in a two-income household. Real estate gets complicated and very specific to the person because the ability to leverage future income differs across people, incomes and appetite for risk. The safest way is to own the roof over your head fully. Then, as a retirement planning tool, it is fine to buy a second property that you let out. Of course, the ability to deal with the seamier side of India as soon as you get into any property deal is something you need to be able to stomach. Makes me sick—but that’s another story.
You’re doing OK if you have some cash in the bank towards an emergency—think of three months without income if you are trying to wrap your mind around the “how much” question. In addition, notice that investment in equity is coming last after all of the above. You are doing OK if you have a portfolio of mutual fund schemes that follow the Mint50 list of funds. You’re choosing four to six schemes and funding them every month, never mind the boom and bust cycles.
How much should you be investing? Save your age. If you are 20 years of age, 20% of your income is good. At 30, with no assets to your name, you need 30%. At 40 and 50, likewise. Most people do have some asset build-up by the time they hit 35-40, so after counting in the 24% of basic that goes into risk-free EPF, it is safe to put the incremental amount into equity funds. We tend to make baskets of our investments and break up the monthly savings further into equity funds and safe fixed deposits. After all of the above steps are over and you have a number that you know you can save in addition to all the premiums, EMI, PF cuts, tax and all the rest, go solidly for equity funds. And you’ll do OK.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and can be reached at email@example.com