Six financial planning myths -- BUSTED

Recently I met a young couple that asked a few questions, which got me thinking. Since many people regularly ask me these questions about financial planning, I thought why not debunk the myths that surround it.

There are these two myths that surround financial planning and mislead individuals in taking wrong decisions. They are:

• Financial planning is only for individuals with loads of money
• Financial planning means investment planning and once you invest, your financial planning is done

Although these are the most common myths that surround financial planning, there are few others, which need to be addressed along with the ones mentioned above. These are:

• I have health insurance provided to me by my company and hence I do not need more
• My life insurance is enough to sustain my family after my death
• Retirement is a long way to go and hence no need to think about it or start saving just from now. Anyways if I save Rs 1 crore it's
  enough to sustain me throughout my retirement
• My estates will automatically pass on to my heirs hence there is no need to write a will

I would like to start debunking these myths with the example of this young couple, who had come to meet me: Rajesh and Aparajita Sinha, 30 and 28 years of age.

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Rajesh works for a pharma company and Aparajita who was working before marriage is a homemaker now. Last year they had some medical emergency in the family. As the family member who was sick was not adequately covered (with health insurance), they exhausted most of their savings and borrowed money to meet the expenses. This has put their finances under a considerable amount of strain.

The problem was their neighbours and friends asked them to invest in products about which they did not have much knowledge but nevertheless thought that as long as they were investing, it was fine. But because these products had a lock-in period, they could not redeem them even though their investments were not much.

They are now left with a bare minimum amount in the form of some savings and have debts that include borrowing on their credit cards.

The author is a certified financial planner and can be reached at dhanplanner@rediffmail.com

The first question they asked me and which apparently is the first myth is: We do not have enough money, so does it make sense to go in for financial planning?

In fact, in the financial mess in which he is in, it makes even more sense for him to go in for financial planning.

Why? Because individuals with limited resources have to maintain a stricter vigilance over their money flow so as to maximise whatever hard-earned money they are earning. In Rajesh's case, since he is the only earning member of the family, it makes even more sense for him to go for financial planning as he has to plan his finances in the best possible way so that not only does he repay his debt as soon as possible but also plan for his risk, goals, and retirement.

This is true not just for Rajesh but also for all individuals who face a similar situation like him. Be it a youngster who has just started her/his career or an individual nearing retirement.

Do remember that financial planning involves loads of factors which not only helps you in planning your goals but also meeting unforeseen risks, insurance planning, investment planning, retirement planning, analysis of cash flow statement, that is, your income and expenses, your current standing, that is, your assets and liabilities, insurances and existing investments.

Which brings us to the second myth: I have invested money so my financial planning is taken care of.

This is so far from the truth.  As seen above, there are loads of factors that go into making a viable financial plan. Let me explain using Rajesh 's example.

As you already know Rajesh invested his money based on recommendation of his friends and neighbours. He was happy as he thought he is investing his money and it is not just sitting idle in his savings account. Neither did he undertake any research nor did he review any of his investments.

He was happy with it until the time emergency came knocking. Since he was ill prepared for that emergency, he had to borrow. So the whole point is that just by plain investing, your present and your future is not taken care of.

In fact when an emergency comes into picture, risk management or risk planning, which besides contingency planning, involves insurance planning as well is also equally important.

So instead of plain investing, planning for various aspects of life is also important.

Just as I mentioned above, financial planning involves various aspects including analysis of the existing situation. As we were going through Rajesh's insurances, he gave details of his health insurance provided to him by his employer. Also two traditional plans of small amounts were all of the life insurance that he had.

Here is where I would like to address the third and the fourth myth: Health insurance as provided by my company is enough or entrepreneurs have common belief I have enough savings to help through medical emergency and hence will not require health insurance.

For service industry individuals most of them have health insurance provided by their employer. Rajesh's health insurance was a floater policy, which is true for all health insurance policies provided by any individual's company. The amount of health insurance was Rs 2 lakh. This covered Rajesh, his wife and his parents.

But is this enough? What happens if Rajesh changes his job and the next employer does not cover health insurance or provides a health cover less than this amount?

What will happen after he retires? In fact post retirement the most important factor is to have an adequate amount of health insurance in place, as that is the time when adequate health insurance is a must. The disadvantage of floater policy is that. in case in one year, one of the family members uses up, say Rs 50,000 of the health insurance limit, then only Rs 1,50,000 will be available that year for Rajesh and his parents.

Individual policy, though slightly more expensive, is always preferable, and Rajesh being young he could easily get it at lesser premium amount, and with years to come, his no-claim bonus will also help him. In fact even business class does not think of health insurance.

Their major argument is that 'I am young and nothing will happen to me' or 'I have enough savings to sail me through'. Is this right? One serious medical problem and individuals with Rs 5 lakh's worth of health insurance find it difficult to cope with it.

Again yes you are young and nothing happens but what when you start aging. To get a health insurance post 45 becomes difficult and also there are number of stipulations which come in place with age.

Myth 4: I have adequate life insurance

Just as Rajesh had two traditional plans in place of an amount equivalent to Rs 5 lakh. Although traditional plans give your money back with added bonus it happens only after the expiry of the tenure. Generally the tenures are for 20 or 25 years. What will be the value of this amount after 20 years considering inflation? One more important fact to bear in mind is that the amount has to sustain your family members (dependents) throughout their lifetime.

Individuals with kids have to think of their children's education and marriage. Individuals with loans also have to factor in loan amount so that on their death, the burden of the loan does not fall on the loved ones. Now how many of you can say you have adequate insurance amount?

Moving to the fifth myth: Retirement is too far away and once I save Rs 1 crore, I am covered. This was what Rajesh thought. How many of you can relate to this? Planning for retirement has to start as soon as possible.

For individuals like Rajesh who have just began their career it is hard for them to think about retirement. Well the sooner people like him start the lesser the amount they have to save for their retirement as with time on their side the power of compounding works wonders for their savings.

The later they start saving for retirement, more is the amount required to save. Also, with today's rising costs, do you think Rs 1 crore is enough to sustain 20 years post retirement? Rethink!

The last myth, again a very important and especially relevant in the Indian context, is: My estate will automatically pass on to my heirs.

Well I guess no further explanation will be needed when we review the famous dispute between the Ambani brothers after their father, the late Dhirubhai Ambani, passed away without a will.

There is one more myth associated with will planning: I do not have enough estate to pass on so why make a will? It's not about how big your estate is but whether you want to pass on anything to your heirs or not? If yes then, big or small, a will is a must.

A simple process like budgeting also comes under financial planning or a complex process like planning your portfolio also comes under financial planning. For Rajesh with the help of just an analyses of his cash flow and existing investments and assets and liabilities will be very helpful as this will help him in meeting his financial liabilities and also charting his future financial course.

It is not about meeting a professional but a little self help, discipline and being practical can do wonders to your finances.