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Are you considering the purchase of an endowment policy? Perhaps a cash back policy? Perhaps your friendly agent told you about a policy or a "magic plan" that would offer constant pension guaranteed by the government? Please read the following before buying an LIC policy or any insurance policy that has an investment component associated with it.

A request to readers who understand the pros and cons of mixing insurance and investment: Please consider sharing this post with your friends or relatives with the sharing buttons the on the left.

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"Why should I invest for my child's future needs like education or marriage?", asked a reader. "Why can't I simply get them an education loan?", "why can't they foot their own marriage bill?".

Well, we need to invest what we can for the simple reason that life does not pan out the way we plan. Especially when their school graduation is years away. While retirement is the number one financial goal, anyone who says they will not be spending a dime for their children's college education/marriage are either not yet parents or just not being practical.

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This is a guest post by S R Srinivasan, who is one of the most erudite users of freefincal. I had the pleasure of interacting with him twice at the Bangalore investor workshops. He talks about money management and growing wealth to new employees in his company and he kindly agreed to describe his approach and share his slide deck with us. Over to him.

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In this write-up, I discuss an  engineering (methodical) approach to personal finance. I introduce the concept as growing wealthy using an engineering approach. I then describe the parts of the approach in some detail. A full presentation that follows this approach can be found below.

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Investing requires a target. The future needs of our family or financial goals serve as natural targets. Goal-based investing is a process in which invest according to the needs of the goals. The amount to be invested and where it will be invested will depend on the nature of the goal.

Once the goal based investing journey starts, the next step is to learn: how to track financial goals.

As always, what follows is based on “what I would do”. You are free to critique it.  My view towards money management and personal finance is: do what you are comfortable with and ensure minimal maintenance and stress.

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For a given financial goal, how do I determine the asset allocation? That is, how do I decide the amount of equity exposure and therefore, fixed income or debt exposure?  Let us try and discuss this and use a calculator to see how different asset allocations will affect the future corpus intended for a financial goal.

Step 1: Decide equity exposure

There is no formula to decide the right equity exposure. There is no right way or wrong way. We need simple personalized thumb rules.  I would like to base my rules  based on rolling returns of an index like Sensex or Nifty.

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