Cost of Delaying Financial Decisions

We have grown up listening to Sant Kabir’s word of wisdom about where he emphasizes  that we must not procrastinate today’s work, as you will have no time tomorrow since there will be more work for tomorrow.  But now, we are grown ups and the world has changed & no one is there to correct us at every step. Not following Kabir’s rule of time will impact our financial life. Here’s how…

If we look at the financial life pyramid it can be divided broadly into 3 parts. The foundation is protection or risk management, in middle it is wealth accumulation & top of it is the wealth distribution. (This article also got published in Business Standard)

Protection or in simple words Insurance:

There are things which are beyond our control and we should be prepared for such untoward incidents and always have a PLAN B with us. By the way, most of the people don’t even have Plan A. But let me explain both:

Plan A: Everything goes well and one is able to fulfill his financial goals out of his regular income and investment.

Plan B: If something goes wrong which we can’t foresee today, Insurance takes care of our Plan A.

So Insurance builds the foundation of any family. 3 of the most important policies that anyone should have is Term Plan, Health Insurance & Accidental Policy.

Term Plan: Term policy is insurance at its purest and simplest form. You pay premiums because there is a guarantee that if something happens to you, your family will be paid out the pre-decided amount, hence you have peace of mind that even if you are not there, those loved ones you leave behind will not have to bear a financial loss. Term Insurance is protection against risk of life.

  • Premium rises with age so if you delay it for few years your premium will be substantially higher.
  • In case if you are diagnosed some critical illness – either you will be denied insurance or your premium rate will be higher by 25-50%. This called loading of extra premium.
  • In case if something happens to the bread winner in this period – I think the consequences are beyond any explanation.

Health Insurance: Today one of the world’s biggest problem is health care. This is getting expensive, by the day.  Even Indian doctors want to use latest available technology and the downside of that is the huge associated cost. So health insurance policy can be really helpful.

  • Biggest problem is if you developed a disease in this period & then reach an insurance company – either you would be denied a policy or that disease will be excluded or include only after 3-4 years. So you will have to keep praying to god that the disease does not reoccur.
  • Ask any of your friends whose family member was recently admitted in hospital – “What was the total billed amount?” . There is high probability that you will get heart attack – if you survive, next day you will buy a health insurance.

Accidental Policy: Sometime life plays strange games – You will be reading about Aruna’s case that she is subconscious from last 37 years & now family is asking for ‘euthanasia’.  Think of someone who is in 30’s & lose either his legs or hands in an accident. From being biggest asset of the family he suddenly becomes a liability (certainly on economic grounds only). Comprehensive accidental policy can be really helpful in such circumstances.

Wealth Accumulation or what people call Investment:

Now let’s come at the second level, which every one appreciates is the most important part of their life but still neglect and do anything.

Let me take my own example and explain you. Assume I am 30 and I have decided to plan for my retirement at 60 and would like to invest monthly. I did some calculations with 15% return that I expect from my Equity Mutual Funds and came up with some astonishing facts and figures.

I have three options – invest Rs 5000 starting now or Rs 10000 when I turn 40 or I can easily save Rs 30000 in last 10 years of my working life & total investment in final option will be double of first one. You know what will be my retirement corpus? In first case it will be Rs 2.82 crore, in second case it will be Rs 1.33 Crore & in last case my accumulation will be just Rs 79 Lakh.

If I put it the other way: What if I need Rs.2 crore at the time of my retirement and I again have 3 options starting at 30, 40 or 50. The monthly investment when I started at 30 will be Rs.3551/- and total investment will be Rs.12.7 Lakhs, in second case it will be, Rs.15071/- and total investment will be Rs.36.26 Lakhs and when I started at 50 figures were shocking – monthly investment will be Rs.76,040/- and total investment will be Rs.91.2 Lakhs.

You can clearly see cost of delay is huge. Due to Power of Compounding Investments Done in Initial years are the main chunk of your Final Corpus. The amounts required to compensate time delays are huge.

Wealth Distribution or Estate Planning:

Division of assets is a sensitive matter & people keep delaying it but there is again a huge cost of delay. People fail to write a will or even check the basic things like nomination etc., in investments. Sudden demise makes the lives of their families miserable. Smooth succession planning is very important part of one’s life.

So don’t delay important financial decisions & consult a good financial advisor now. Being casual about it spells trouble. You need to act. Like the NIKE’s slogan says, “JUST DO IT”.

Hope this article will be helpful for you – please share your views. 🙂 Must Share this article with your friends & well-wishers.

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50 COMMENTS

  1. Great article Hemant..Agar aap samne hote to ser jhuka ke aap ko salaam karta 🙂

    Now I wish when i started working in 1999 and read/applied the understanding of this article at that time with Rs 500 SIP in equity fund, then my current bank balance would have been lot better than what it is at present 🙁

    Average Joe does not understand the POWER OF COMPOUNDING which is hidden in POWER OF STARTING EARLY or as you put it COST OF DELAYING..

    Dhawal Sharma

  2. Hi Hemant,

    Good article….

    I’ve seen that, most of our mentalities are looking into a guaranteed but good % of returns and they are always feared of investing in MF’s….

    I believe, there should be a more Workshops at each and every place on the Financial literacy to change their attitude…. What say…..

    Anyways keep it up 🙂

    Mani

  3. Good article Hemant.

    I have some doubts. I haven’t taken any term/health insurance since I am having the it from my company. (Me and my dependents are covered). Even if i shift the company also, I will get another from the new firm. And currently the sum assured is bigger than my current financial value. And corporate plans always have better options. For example, more diseases are covered, maternity is covered etc. I am planning to take term and health insurance once I am out of job or the time when the financials go beyond. (like taking some loans). Is this approach correct?

    I agree that taking any sort of insurance at later time will have an increased premium. But consider the amount that I am saving by not paying premiums currently. I am not sure if I am right. Can you please put some lights…

    Thanks and Regards,
    Shinoj Jose

    • this is really a very good article……

      Sir, Why in market Term Insurance are not sold in the same level as Other Insurance ? I have seen in the market that people are toiling hard to pay their Insurance premium, but they don’t possess Term Insurance ? Why the energy level of selling and buying Term Insurance is lower as compared to other Insurance products?

      • Hi Jisa,

        Money is the biggest motivator
        For Clients: They want something back at the time of maturity – so they run away from term plans. psychology
        For Agents: They earn more in other products when compared with term plans – as premium are very low in term plans.

  4. Great article Hemant sir.. Thank you so much. Ofcourse, we Must Share this article with our friends & well-wishers.
    Please suggest me in this regard.. I’m 28yrs old. I have 10 lacs Term Insurance from LIC. Planning to have one more of 10 lacs from some other Insurer. Please suggest good insurer apart from LIC. Also plz suggest good Health Insurance/Accidental Policy. Planning to invest 4-5K per month in SIP from this month onwards. I’m a central govt employee.. My Salary is around 25K per month.

  5. Hi, Thanx for the advices, i recently got rid of a lic agent determined to sell me some stupid policy. I opted for a term policy he said he’ll come back soon but, didn’t.
    I’m 25 now, unmarried with 30k income p.m. I already have NPS policy from govt. Now i have 2lakh lump sum. I want to save 15-17k p.m. Kindly advice about investing 2lakh and monthly savings. Thanx 🙂

  6. i have already sip in mutual funds and ulips for last 7 years around 12000 per month. sometimes i withdraw some units also. and lic jevan shree policy premium rs 31500 yearly .premium stop may be in 2014. and mature after 10 years . if i want to invest 20 lak. where should i invest. i get from some property sale out . thanx pls reply

  7. Hi Hemant,

    You are doing some wonderful act by sharing such great article. Kudos to you.

    I want to know what is comprehensive Health policy.

    Thanks in advance,
    Vijay

    • Thanks Jwalant 🙂

      Comprehensive health insurance pays for everything over a certain fixed amount, called the deductible, which the insured is required to pay out of his own pocket.

  8. Hi Hemant,
    Please advise me the best NFO in which I can invest as SIP.
    Is it ok if I have a SIP in already existing MF whose NAV has already reached 20 or more or NFO is better.
    How about Reliance Fixed Horizon Fund – XIX – Series 3
    Shall I invest in this for long term.
    Awaiting eagerly for reply…

    • Hi Anita,

      Say NO to NFO 🙂

      Their is no difference in 10 rupee NAV & 200 rupee.

      Reliance Fixed Horizon Fund – XIX – Series 3 is a debt product & should be avoided for long term investments.

  9. hi hemant,
    Iam paying rs 25500 for LIC jeevan mitra double cover endowment plan for last 2 years.
    Could u please suggest that i should continue this plan or stop it, and go for term plan or some other thing?
    Since its premium is too high and from your articles and market research it seems that its return after 21 years will be low too.
    My age is 27.

  10. Hi Hemant

    Could you please guide me on the Accidental Insurance Policy. Most of the time it is offered as a rider along with life insurance policy. Can it be taken as independent policy?

    Thanks

  11. Hi Hemanth,
    I have existing home loan with ICICI bank and my EMI is very high 38K.
    Wanted to find out if the rate of interest ( floating) will further go up?Is it a good idea to do part payment of loan? Or is it better that i transfer the loan to LIC housing finance at 10% fixed for 5 years.

    Thanks

  12. Hi Hemant, Good Article.
    I am 32 and have take home of 42k. I have started investing in MF SIP as per below from Jan 2011:
    Birla Mid Cap: 1000 – Growth – Centur SIP till i am 55 yrs
    Birla Frontline Equity: 1000 – Div Payout for 36 Months –
    HDFC Top 200: 500 – Div Reinvestment – for 60 months
    HDFC Equity: 500 – Div Reinvestment – for 60 months
    Reliance Tax Saver – 500 Div Payout- for 12 months
    Fedility Tax adv – 500 Growth – 12 Months
    Fedility Equity – 750 – Div Reinvest – 60 Months
    Frankline India Blue Chip – 500 – Div Reinvest – 24 months

    As you can see, I have broken up in too many MFs, and some of them are in similar category and it is difficult for me to keep track. Can you suggest a way to consilidate. I have started each SIP with a specific goal.

    Looking forward to hear from you.

    regards,

    Deepam

    • Hi Deepam
      You have mentioned that you have started each SIP with a specific goal but from your investment your goals are not clear to me.I do not understand why some SIPs are with dividend payout and others with dividend reinvest option.Moreover you have selected two funds each from three fund houses.This is not proper diversification.For consolidation you can consider having only one fund from each fund house.

  13. Hi Hemant,

    I am 28 yrs old and investing in ICICI pru life stage pension plan for 2,000 per month for last two years. The term is 20 years

    Do you think it is enough or should I change my strategy

    Thanks

    Regards

    Ramit

  14. Hi Hemant
    Right now I am in the middle of the financial life pyramid.So I am only concentrating on investment.I would like to modify the example given by you as follows.
    Start investing Rs 5000/- per month when you are 30.
    Increase it to Rs 10000/- per month when you are 40.
    Increase it to Rs 30000/- per month when you are 50.
    There is no harm in adding something when you are 35 and 45.

  15. Hi Hemant,

    I am following TFL from last 1 week… it has proved very useful to me…every day I am exploring something new related to investment, saving and insurance…
    I am 24 year old and working from last 2.3 years with one of the leading IT Firm in India.
    I have not saved much in these years…I have the following two insurance policies with me:
    1. LIC Jeevan Saral – 2000/month
    2. LIC Market Plus – 1500/month,
    both of the above mentioned policies are for a period of 30 years.

    now I am Planning to start the below mentioned SIPs:
    1. HDFC Top 200 (Short Term)
    2. DSP BR Equity (>10 years)
    3. Any Tax Saver fund

    I have a question here, what is the difference between “taking a long term SIP(appx. 10 yrs)” and “taking it for 1 year period and renewing it every year for the next 10 year”. By the later approach we can get in touch with our advisor atleast once a year and also will keep a track of the fund. Please tell me the Pros and Cons.

    Third, I need to take Term Insurance, Health Insurance and Accidental Cover:
    For this I would like to ask whether i need to take a Term Insurance now itself or I can delay it till my marriage/the age of 30. Secondly, I am cover under standard Health Insurance cover by my employer which will be discotinued when my services will be discontinued with the employer, so do I need to take an additional HIP.

    • Hi Saurav
      It to good to know that you are planning to start SIPs in equity mutual funds.Investment in equity mutual funds is done to meet your long term goals.Once you start your SIPs you must remain invested for atleast five years.It does not make any sense to start a SIP and then renew it after one year.

  16. Thanks Anil,
    My advisor is suggesting me to start with the followings funds for 3 years:
    1. HDFC Equity
    2. DSP BR small and midcap
    3. Franklin bluechip

    should I go with him or should extend it for 5 years as you said? Please suggest…

    • Hi Saurav
      It does not make any difference whether you start your SIPs for three years or five years as you can extend your SIP as well as stop it any time.But it is important that your investment horizon should be more than five years.Funds suggested are good.

  17. sir
    your articles are always very good. I am following since last one month. now I eagerly wait for the new one. Now a question for u- what products a good financial adviser should have for his clients to offer.
    with regards
    Indrajeet Singh

    • Hi Indrajeet,
      Good financial advisor never limit himself to some set products – he looks at the requirement of the client & then suggest products that can help client to fulfill his requirement.

  18. i jst subscribed on ur site. while surfing on google i gt thrg ur article. very useful. am luking for international critical illness plan for my husband & myslf . can u suggest me abt dis? v r settled in dubai .my husband s 36 yrs old & am 33 yrs.

    Regards,
    Veena.

  19. Dear Hemant ji,

    i am 35 yrs & want to invest for future. earlier i have lost huge money on lot of Ulips.. Now i want good amount for my daughter..Right Now i have 2 policies of Birla sun life, 1 LIC & Accident policy, Now planning to Buy Term Plan.. But Now requird Lum sum Good Amount for my Daughter future.., Pls Guide Now i am intrested for PPF & NSC, Pls advice your point of view..

  20. sir, what a great, enlightening article. I specially like your stratification; risk management, wealth accumulation and wealth distribution. Its been a great help to me. Thanks!

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