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Session 3: Checking your Financial Health

We are glad to have you with us for our Third Session - Checking your Financial Health

Alright so now let's get started.

To begin the session, let's start with an introduction to financial health

All of us want to live a healthy life, so we go to our doctors for regular checkups. But have you visited a Financial Doctor as well? While many of you may be surprised at this question, let us apprise you that like you undergo a health check, it is imperative to have a "Financial Health Check-up" as well, if you desire that your personal finances remain in the pink too.

So, here in our learning session today, let's learn how to check your Financial Health.

Checking your Financial Health

In order to check your financial health, you need to ask yourself a few questions related to your finances. So the 1st question that arises...

Are you aware about your cash flows?

i.e. Your cash inflows and outflows

If you are aware about your cash flows: Congratulations! You have got your 1st step right towards managing your finances, but if not, then you should immediately make a detailed chart of your income and expenses. It will enable you to know where you are spending your hard earned money and you may also come across some unnecessary expenses, which you could curtail to have better cash inflows.

Are your finances getting better or worse every year?

You see, as we all engage in an economic activity to make a living and have financial commitments to meet, we also need to assess if our personal finances are getting better or worse.

If your personal finances are getting...Better

You are getting financially healthy!

Congratulations! Your income is increasing at a higher rate than your expenses and you are getting financially healthy with each year that goes by.

But if your personal finances are getting...Worse

You should seriously start worrying... Why?

This is because your income is increasing at a lesser rate than your expenses and some day you may face a scenario where your income is insufficient to pay off all your expenses.

To avoid such a scenario you should either try to increase your income or reduce your expenses

Building Contingency Reserve

Can you pay for your regular expenses without having any income?...(In case you do not have a job for the next 6 months)'s Time you build a 'Contingency Reserve'

You see, we all need to set aside some portion of our income to take care of the rainy days. And if you haven't done that, you could possibly face a financial crisis. So start building a Contingency Reserve of minimum 6 months of your regular expenses

So if your monthly expense is Rs 50,000/-

Your Contingency Reserve = Rs 50,000/- X 6* Months = Rs 3,00,000/-

(The figures used are for example purpose only. This is a recommended number. We would urge you to speak to your financial advisor to help you arrive at an appropriate number based on your risk profile.)

Know the extent of your liabilities...

Do you have any loan?

If you have a loan, you need to pay EMI on your loans and EMI is one of the major portions of your regular expenses...

If such EMI accounts for more than 40% of your monthly income then you are inviting financial risk...

If your monthly income is Rs 1,00,000/-

Ideally, Your EMI should not exceed 40%* of Rs 1,00,000/-, i.e. Rs 40,000/-

(The figures used are for example purpose only. This is a recommended number. We would urge you to speak to your financial advisor to help you arrive at an appropriate number based on your risk profile.)

What can lead to Financial Risks?
  • Increase in Interest Rates can increase* your EMI (which will overstretch your monthly expenses)

  • High monthly expense will lead to low savings (which may even have an impact on your commitment towards your financial goals)

  • If you choose to increase the loan tenure by keeping your EMI the same, you will have an extended repayment term (and will have to carry your liabilities for some more years. And, maybe, postpone some of your financial goals)

...You see this is something for which you may not be financially ready...

So it is advisable that your expenses towards EMI should never be more than 35-40% of your monthly salary or income. Do not overburden yourself.

*In case you have opted for a floating rate loan

Is your investment portfolio well diversified?

Diversification can be done across many asset classes such as equity, debt, gold and real estate. It is one of the basic tenets of investing that helps you reduce the overall risk to your portfolio. Thus it is important that you diversify wisely.

Are you overexposed to Equities?

Equity as an asset class carries high risk. When you are young, your ability to take risk is high...

But as your age increases, your ability to take risk decreases. So consider your age.

A Basic Thumb Rule... Theoretically as a thumb rule you can invest 100 minus Your Age as a percentage into Equity and the rest can be in debt.

Investment in Equity (%) should be 100 - Your Age

For Example:

(If) Your Age (is) = 25 years

Investment in Equity (%) = 100 - 25 = 75%

(The figures used are for example purpose only. These are recommended numbers. We would urge you to speak to your financial advisor to help you arrive at an appropriate number based on your risk profile)

Your Investment in Equity should be 100% - 25% i.e.75% and the rest 25% can be in debt and gold. As your age increases, and you approach your goals with more commitment, your risk taking ability reduces. So with each passing year you will need to gradually reduce your exposure to equities.

How do you invest?

Lump sum or via Systematic Investment Plan (SIP)

Investment habits can have a big impact on your returns especially in Equity...

As it is almost difficult for anyone to time the market correctly, it is advisable to invest via SIP rather than lump sum in Equity markets, as they offer you the advantage of rupee-cost averaging and compounding. Disciplined investment is good for your financial health.

Monitor your Investments

Do you monitor your investments regularly?

Investing whatever you save does not mean that you will be able to earn good returns; you also need to monitor your investments regularly.

If your investments are not in line with your asset allocation or are not performing well then you may have to do alterations to your investment portfolio as well

Do you have enough Life Insurance cover?

Life insurance cover protects the family financially in case of demise of the breadwinner of the family.

Your Life Insurance Requirement = Your Monthly Income X12 Months X10 times

You should at least have 10* times your annual income as a life insurance cover.

For example:

If your monthly income is Rs 1 Lac

Your Insurance Requirement = Rs 1,00,000 X 12 X 10 = Rs.1.2 crore

(The figures used are for example purpose only. These are recommended numbers. We would urge you to speak to your financial advisor to help you arrive at an appropriate number based on your risk profile.)

If you don't have the life insurance cover then you should immediately buy one and protect the financial future of your family. And we believe, the prudent way to buy a life insurance cover is through term plans; because the sole objective in insurance is to indemnify risk. Remember, not to club your investment and insurance needs together with "investment-cum-insurance plans". They may prove costly.

Have adequate Health Insurance cover

Do you have enough Health Insurance for you and your family?

Like life insurance it is imperative to have a health insurance cover as well.

Health insurance cover reimburses the hospitalisation bills in case the insured has to be hospitalised for any illness. So it's always better to take a health insurance cover at an early age because as age increases, the chances of being diagnosed with some disease increases and if that happens then it may be difficult to get an adequate health insurance cover.

Points to Remember
  • Know your cash flows and avoid making unnecessary expenses (...stay within your means)

  • Create a contingency reserve of minimum 6 months and preferably 12 months ( will take care during emergencies)

  • EMI should not comprise more than 35-40% of your monthly income (...else you may be overburdened with your liabilities and invite financial risk)

  • Diversify your investments ( will help reduce risk in your portfolio)

  • Invest via Systematic Investment Plan vis-a-vis lump sum investment in equity (...SIPs can help inculcate discipline in your investments and keep you financially healthy)

  • Monitor your investments regularly (...It is important to track your investments and take timely action)

  • Have an adequate life insurance cover to financially protect your family (...your family will not have to face any financial difficulties in your absence)

  • Have an adequate health insurance cover for you and your family.

  • Taking care of these small things with your finances can help keep you financially healthy

So to end our today's learning exercise we now invite you to test your learning by taking up this simple quiz (and win exciting prizes!)

Just Click On The Link Below

Thank You For Participating!

Disclaimer: The contents of this document are only for informative purposes and are not to be used or considered to be an offer to sell or buy units of Franklin Templeton Mutual Fund schemes. This video is for information purposes only, provided on an 'as is' basis. Nothing in it should be construed as personal financial advice. You are responsible for your own investment decisions and you should seek advice concerning suitability from your investment adviser regarding any of the investments mentioned. The video is for personal non-commercial use only and may not be copied, stored, redistributed or broadcast in any way. We recommend you read the complete Terms of Use.

Mutual Fund Investments Are Subject To Market Risks, Read All Scheme Related Documents Carefully.

The Retirement Planning Guide

The Retirement Planning Guide