Financial planning is an essential part of one’s life journey. A large group of us, commonly referred to as the middle-class, at times are unable to find financial solace. Lack of stability could be due to several reasons, such as incurring inadvertent expenses, not setting the right monetary objectives or turbulent inflows. Therefore, we have worked on to gather the top ten financial planning tips for the middle class to help them achieve the mental peace they deserve.

As per a research, the Indian middle class constitutes approx. 28-30% of the total population. Further, there are several layers within the Indian middle class as well.

Some of these tips are the way of life, and acquiring them happens over time. The other few are just good habits, and practising those can happen immediately.

People often ask, what personal finance tips do you have? Or what are the your financial planning tips for the middle class? Here is an attempt to address some of these fundamental questions.

Always remember, financial planning is not about making quick money or getting rich faster. It is also not about reducing expenses. The idea is to protect assets and secure the future. It is also about making sure your money is available when needed and having enough resources to lead a comfortable life.

#Top Ten financial planning tips for the middle class:

 

01. Create an emergency fund

02. Purchase a Health insurance

03. Buy a Term Insurance Policy

04. Know your monthly expense

05. Be an early investor

06. Determine your investment objectives

07. Create a secondary source of income

08. Avoid the debt trap

09. Optimize the tax expenses

10. Believe in investing

Let us understand each of these financial planning tips in greater detail:

#01 Create an emergency fund

The emergency corpus will serve you at the time of any unfortunate event. The emergency fund will help you tide over financial distress in the circumstances such as job loss, sudden medical expenditure etc.

Many of our routine expenses are fixed in nature and do not change with a change in financial situation. The emergency fund helps you meet immediate financial requirements.

A survey conducted by Spending Behaviour in India shows 60% of Indians have less than Rs 5,000 in their savings account. Almost 90% of young Indians have less than Rs 25,000 in their emergency fund.

The statistic is alarming, and indeed, there is a need to educate ourselves.

Also, read my article on Financial Freedom.

#02. Purchase a health insurance policy

Medical expenses come unannounced and leave no time to manage resources. In such situations, a Mediclaim policy helps you navigate and pay the hospitalization bill, either entirely or in part.

An insurance policy is essentially an agreement between the insured and the insurer. The insurance company agrees to pay or reimburse costs up to the sum assured.

Mediclaim is a type of health insurance that reimburses the policyholder of eligible expenses incurred to treat a medical complaint.

Read here to know all you want to know about the Mediclaim policy.

#03. Buy a term insurance policy

Term insurance is the purest form of life cover and the most conventional form of insurance. Term insurance will take care of the financial independence of your family in your absence.

In case of the insured’s death, the sum assured gets paid out as per the insurance terms. These funds can:

• Help the surviving family members maintain their lifestyle
• Pay any immediate medical bills
• Meet short-term needs (education costs, cost of marriage in the family, day to day expenses etc.)
• Protect wealth erosion of family
• Repay existing debt

If you have a family, then it is essential to buy a term insurance policy. To know more about term insurance and how much term insurance is required, read here All about term insurance.

#04. Know your monthly expense

An often ignored aspect of financial planning is understanding the outflows. Managing expenses is as vital as generating income or improving returns from investments.

The easy availability of credit cards is a blessing when used optimally. However, if left uncontrolled easy usage can lead you to impulsive spending.

The best way to manage the monthly expenses is to draw a budget and track expenses against the same. However, maintaining budgets can be time-consuming. If you want to keep it simple, scan your monthly bank or credit card statement. Over time, you will get a good sense of expenses.

Knowing the monthly expenses is not to reduce cost; instead, it is to understand the outflows.

#05. Be an early investor

Early-stage investing helps in many ways. One of the most significant benefits is the power of compounding.

Suppose two people started to invest the same amount. The one who began early gets disproportionately higher income due to the compounding returns—income compounds when the gains on investment begin to earn income.

The process creates a chain reaction, wherein income gets reinvested. Additional income continues to get generated until the investment remains.

If the concept of early investing interests you, read about the Benefits of early investing here.

#06. Determine your investment objectives

A focused approach to achieve set goals is always beneficial. An investment strategy aims to meet financial goals keeping in mind the risk appetite and preferences.

Here are a few thumb rules to make the investment plan:

• Define the goals
• Split them into immediate, short-term and long-term
• Distinguish between a non-compromising goal (e.g. marriage fund) and a flexible purpose (e.g. travel)
• Identify the available asset classes – Equities, Bonds, Property, Gold, Cash, Insurance, Investment in business, etc. With the advent of technology and ease of operations, investing in any asset classes is possible. However, there may be an individual preference towards one vs other
• Determine the risk appetite
• Note down constraints (e.g. liquidity needs, etc.)

Once you know your goals, you have to align the investment, tag them to the objective, and track their progress.

Do read about How to create an investment plan here.

#07. Create a secondary source of income

Always remember that savings is a percentage of total income and not residual left after meeting expenses. The plan should be to save money regimentally and invest systematically. Revenue from these investment assets forms the secondary source of income.

Follow the golden principle, increase your savings, and reduce debt. The focus is to develop multiple sources of income through investments.

#08. Avoid debt trap

Debt can be a profound way to upgrade your lifestyle and fulfil your dreams. If planned well, debt serves the purpose as desired.

However, interest paid on debt can also be the most significant impediment to your financial progress. Unplanned debt and inturn interest can be a considerable deterrent that impacts savings.

Unless you can plan your leverage and use that to your advantage, the goal must be to retire the debt (costliest first) as early as possible.

#09. Optimize the tax expenses

Tax costs can be considerable if left unplanned. Any significant outflow will derail you, even if temporarily.

It would be best if you avoid hit-or-miss selling decisions. Form a buying-selling strategy, allow enough time to review the same from the perspective of tax outcomes. Ultimately, the objective is to be tax-efficient in your transactions.

Our tax system allows us to avail of certain benefits based on income slabs. Evaluate those exemptions and plan your taxes to the best possible advantage.

Always pay taxes on time and file returns on or before the due dates to avoid any penalties or defaults.

#10. Believe in investing

The attempt is to continue to increase income each passing day. There are two ways –

• improve the direct revenue, or say, the primary source of income
• invest wisely to enhance the passive income

Never hesitate to start with whatever little you have. A Systematic Investment Plan (SIP) is a great way to start investing small and regular.

Choose wisely amongst the asset classes and diversify the investments. To minimize risk and time investment, go via the mutual fund route. Investing in mutual funds is a reasonably simple and straightforward process. Every investor can find investments that suit their requirements.

If you can understand stock indexes, read financial research, decipher market dynamics, investing directly in stocks is also a good option.

Both mutual fund and stock are acceptable methods of investing. You must trust the process and continue investing. Regardless of the means, you must know that investing is a long-term process. It would be best if you remain invested to reap the actual benefits from investing.

To conclude

How to do financial planning? What are the financial planning tips for the middle class?

These questions can be simple as well as complex at the same time. There is no magic wand to get you going on the right path. Therefore, you have to believe in the process and be confident that financial planning works. With that, carefully craft a long-term plan and chances are high that you will succeed.

Never succumb to greed for higher returns and expose yourself to plans that you cannot understand. Keep away from strategies that offer returns that you believe are unachievable. Do not be sceptical about investment options, but always remain cautious.

All being said, financial planning is a long term process and involves decision making. If you are not comfortable with planning by yourself, take expert advice. And with time, patience and perseverance, improve your financial knowledge and awareness. It helps.

The author is a senior finance professional with over fifteen years of work experience in corporate finance and has an affinity for personal finance and investment management. Please leave your comment or share thoughts on this article via email at decodefinance.in@gmail.com. For more articles, please visit the website www.decodefinance.in.

Disclaimer:

The author has used his knowledge, experience, and understanding of the subject to write this article. Any views, opinions, and thoughts mentioned in the article belong solely to the author and not necessarily to the author’s employer (past or current), organization, committee, or other group or individual.

Under any circumstances, the author shall not be liable for any views or analysis expressed in this note. Further, the opinions expressed are not binding on any authority or Court. We advise readers to consult their financial advisor for assistance in their specific case.