Financial Planning is Simple but Overwhelming Part 1

Published: July 6, 2023 at 6:00 am

Last Updated on July 6, 2023 at 7:50 pm

This is my first article after becoming an independent SEBI Registered Investment Adviser. Before starting this article, I would like to thank Mr. Melvin Joseph (founder of Finvin Financial Planners), who has helped me reach where I am today. I have learned everything from him. I do not have enough words to express my gratitude, but I will always be grateful to him.

About the author: Ajay Pruthi is a fee-only SEBI registered investment advisor. He can be contacted via his website This is part one of a two-part series on financial planning.

How can you explain Financial Planning in simple terms?

If you ask me, financial planning can be covered in what I call my Mantra – “7-point Guidelines towards Financial Independence.”  

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  1. You and your family need to define financial goals (time frame and amount).  These goals need to be defined – whether it is a house purchase, car purchase, dream vacation, children’s higher education, and retirement goals etc.
  2. These goals can be achieved and there can only be 3 possible outcomes (considering all the other factors or variants of likely situations).
    • The breadwinner of the family earns and is able to invest as necessary
    • The breadwinner of the family dies before goals are materialized
    • The breadwinner of the family is alive but is not able to work and earn (due to disability) as per the goal amount requirement

What if the breadwinner dies? – Every earning member of the family should purchase term insurance that provides coverage till the age of 60. You can purchase it online. The sum assured should be 20 times your annual income. While calculating the appropriate sum assured, add any loans and subtract your assets (other than your self-occupied home) from it. Choose a brand you are comfortable with. Do not add any riders to it.

What if the breadwinner of the family is alive but is not able to work and earn (due to disability) – Purchase a Personal Accident Policy with Temporary Total Disability (TTD) cover of 50 lakhs –  1 crore. Ideally, your policy should be of the same coverage as term insurance but the probability of permanent disability particularly from an accident is less, hence the coverage is between 50-100 lakhs. You can also purchase Personal Accident coverage for an amount equal to term insurance coverage, which is up to your choice.

What if the breadwinner of the family earns and invests as per the goals? The first goal before starting any investment is to create an emergency fund first.  This amount should be at least 12 times your monthly income if you are a single-earning member and 6 times your monthly income if you and your spouse, both are earning.

Additionally, you should purchase health insurance for your family of around 50-100 lakhs with a base cover of 10 lakhs and a Super Top-Up cover in the range of 40-90 lakhs. Be mindful that there are no room rent sub-limits, no waiting period, and no co-payment in your health insurance policy. You can also purchase a Critical Illness Policy if you have any family history of critical illness. You can also purchase health insurance for your parents/in-laws too.

These 2 steps mentioned above ensure the security of your financial goals. You can start investing, once the above 2 steps are achieved (even if this means that you have to delay investing by 3-4 months). Let’s cover the next 5 points:

  1. Pay all outstanding loans with very high-interest rates before you start investing such as credit card loans, etc. Do not think twice even if you have to withdraw your existing investments to pay for these high-interest loans.
  2. The very first point was about defining your goals and time frame to achieve them. Now, calculate the future value of these goals (considering inflation) and the amount required for investments for individual goals. In terms of inflation, consider the following parameters:
    •  8%-10% for education, and 
    • 6% for other goals. 

For Returns, you can consider the following aggregate return values:

  • 6% for debt instruments, 
  • 10% for equity instruments, and 
  • 7%-9% with a mix of equity and debt instruments.

There are a lot of calculators available online to calculate all these values. All these calculators are also available on Freefincal.

  1. While you are calculating the number of investments required for different goals, please keep the following points in mind:
    • Goals less than 5 years – Invest only in debt instruments – assume 6% returns.
    • Goals between 5-10 years – Invest in a mix of debt and equity as per your risk profile and goals, but do not invest more than 50%-60% in equity instruments for a 10-year goal. Less the duration, the lesser the equity.
    • Goal above 10 years – Invest in a mix of debt and equity as per your risk profile and goals but do not invest 100% in equity unless your goal is 15-16 years away. 
  2. Selection of Debt Instruments – You may prefer investing in PPF, VPF, and Sukanya Samriddhi Scheme first. If you still have an additional amount left – you can invest in debt mutual funds, FDs, SGB, and post-office schemes as per your comfort and tax efficiency.
  3. Selection of Equity – Most investment advisors suggest only equity mutual funds. Some would suggest only index funds and the rest may suggest a mix of index and active funds. The choice is yours. Though 1 or 2 mutual funds schemes are enough, investors are usually not convinced by 1 or 2 schemes. You can opt to invest in 3 to 4 schemes if 1 or 2 schemes do not make you comfortable.

Now, you tell me is it difficult to understand financial planning? You may have realized that it is not difficult, but it is overwhelming for most of us (unless you are a DIY investor). 

Now let’s see why this entire thing is so overwhelming, making it difficult to take decisions. 

  1. Most financial products are sold as per the company’s requirement of profitability and not as per customer requirements. 
  2. Most financial products are purchased based on our emotions and not requirements. So, blaming companies every time is also a mistake.

Confusion in selecting product features based on emotions makes things overwhelming.

Let me give you an example- 

You want to purchase a term insurance policy. You have already decided on your coverage and tenure of the policy. But when you go online, there are tons of options like Limited Premium Payment Term, Personal Accidental Rider, Critical Illness Rider, Policy Term till age 85/90/100 etc. By the time you start thinking about these options, a customer care executive will call you and ask –‘why have you stopped filling the form, is there any way I can help you?’ etc. 

Now, a decision that was very simple becomes an emotional disaster. You might start thinking – Why not take it till age 100, so that my children will get some amount. Will my claim be settled as the insurance companies keep showing their claim settlement ratio? Should I take a rider along with the term policy? So many questions and no answers leaving you absolutely confused. 

The same happens with health insurance too. Health insurance terms are even more technical than term insurance and even more difficult to understand. The question with personal accident policy is that, ‘why not as a rider in term insurance?  And is this policy really required?’

Even after all these confusions, if you have still decided to purchase all insurance policies, here comes the emotional dilemma of paying premiums for all these policies without getting anything in return. And if you add the premium of the health insurance policy of your parents in it, the amount shoots high. Should we buy or should we avoid or can we skip any one of these policies? The confusion is never-ending.

Let us move on to investments decisions now-

You went to a bank to open a Sukanya Samriddhi account for your daughter. The relationship manager told you that there is a better investment product than Sukanya Samriddhi account and is tax-free too like Sukanya Samridhhi Scheme. On top of it, the returns on the product are fixed for the next 15 years. You purchase the product, come back, and proudly announce to your family that you have purchased a much better product than Sukanya Samriddhi account. 5 years down the lane, you start getting knowledge about different products and realize the product which was sold to you was a life insurance policy. What can be done now? To stay invested in the insurance policy or to exit and take the loss?

Another example-

You started earning and started investing in stocks as some of your friends told you that they bought particular stocks and got 20 or 30 or 50% returns. You invested in particular stocks and the stock tanked. Consequently, the only question the investor would ask is – Why does it always happen to me? Whenever I invest in any stock, it starts tanking. You start buying more amount of the same stock trying to average it out. The stock again tanks. Now this is an overwhelming situation, where you have to decide, whether to buy more or exit and take the loss. Most investors do not come out.

One more example- 

Suppose you have never invested in equities or a very small part of your portfolio is invested in equities. All your investments are in debt instruments. Your friends who are investing in equities keep boasting to you about their returns from equities – 10% or 12% or 15% and you start thinking that you are only getting 6% to 7% from FDs. Should we move to equities now? Should we have invested in equities long back? (This situation is mainly with conservative investors).

The typical overwhelming situation with an investor who is thinking to start goal-based investing and try using online calculators is as follows:

Retirement Corpus – 6 Crores, Monthly investment required – 40,000 in addition to ongoing PF, NPS etc.

But I am earning only 70,000 to 80,000. What will happen to my dream house purchase goal, what will happen to my dream of sending my child to any foreign country for higher education? Though these goals may be achievable based on the time frame and priority of goals, the situation is overwhelming at this point in time.

Finally, when you combine all these points, it becomes very difficult to understand them collectively. You might experience a sense of confusion, things may not appear clear, there is nobody for you to approach and there is no one to give you a proper solution. The idea of financial planning is now dissolving and the hope of achieving anything is doubtful.

What can be done? Is there any solution?

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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