In this blog, we are going to see how our financial planning should be and how much part of our savings should be invested in the share market.
Financial planning is the process of setting, planning, achieving and reviewing your life goals through the proper management of your finances.
The first step of Basic Financial Planning is, Term Insurance or Life Insurance as we call it. The meaning of Term Insurance is a smaller premium, bigger cover. If our family is dependent on us and we are responsible enough to take care of them, it is then very necessary to have a sufficient Term Insurance Plan. How much Term Insurance should we ideally have? Our Term Insurance should be as much as ten times of our annual salary.
Let us understand this with the help of a simple example:
If our annual income is around Rs. 10 lakhs, our Term Insurance should be close to Rs. 1 crore. If our annual income is Rs. 5 lakhs, our Term Insurance should be close to Rs. 50 lakhs. Which company’s Term Insurance should you buy? The answer is such a company whose claim settlement ratio is more than 96%.
The second step is Health Insurance. As we all know health is wealth. Most of us have experienced; that a larger part of our savings goes towards health for the purpose of the medication, hospitalization, etc. in case any misfortune happens. So, we need to have a sufficient Health Insurance Plan for the same.
The third step is the Contingency Fund. In case, if any, unforeseen financial trouble arises in the future, we should have sufficient funds with us to manage our daily household expenses as well as our routine business expenses. How much contingency funds should we ideally have? The number of monthly expenses that we require, according to that we must have at least 6 months of contingency funds with us.
So, after making these three provisions, out of the remaining savings, the amount of investment to be made in the share market will depend upon one’s current age. For example, if I have 10 lakhs with me and my age is 40 then out of those10 lakhs, I should invest around 40% amount in safe asset class i.e. banks, etc. Thus, the remaining amount can then be invested in the share market according to a well-prepared strategy.
Until next time…
Happy Trading, Happy Investing!!!
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