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.
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.
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.