Personal Financial Planning: The Survival Skill You Must Master in an Uncertain World

In his seminal book Sapiens, Harari writes that humans dominate the planet not because we’re the strongest or fastest but because we’re uniquely capable of cooperating flexibly in large numbers, and we do this through shared myths. These can be religions, nations, corporations, or money. Money, after all, makes the world go round. Though it has no inherent value, it works because we accept it from strangers, trusting that others will do the same.         

Money is a shared fiction, a story that works because we all agree to believe in it. But without a personal plan, your story can quickly descend into chaos!

Financial planning is creating a roadmap to achieve your financial goals, like retirement, buying a house, etc.—not to be confused with investing, which is putting your money into assets like real estate or financial products like mutual funds, expecting to make a profit.

In India, as we move from agriculture and government jobs with pensions to the private sector, from joint families to nuclear families, from not having money to prosperity, from dependency on children no longer being the norm—it’s a must for everyone.

Unfortunately, personal finance is not taught in school, and talking about personal finance is taboo in India. Because finance is often commission-driven, many products are mis-sold, and confusing jargon makes it hard for non-finance professionals to understand. Things are changing slowly, and the recent negativity notwithstanding, finfluencers have contributed to finances being a part of the conversation in general.

With the lessons of COVID-19 behind us and AI reshaping the future, financial planning is an absolute must for everyone.

Personal financial planning is a simple process with the following steps:

1. Cash Flow Analysis
2. Net Worth Calculation
3. Ensuring Protection
4. Goal-Based Investing

1. Cash Flow Analysis

“We buy things we don't need with money we don't have to impress people we don't like.”

Monthly Cash Flow = Income - Expenses

Income: Salary, Rental income, capital gains, freelance, business, etc.

Expenses: Housing, Utilities, Grocery, Lifestyle & Personal Care, Transportation, Education, Health & Wellness, Entertainment, Vacation/Gadgets, etc. (Divide the annual payments like insurance & car maintenance into monthly amounts)

• Increase your income by upskilling, changing your domain, or building a second income stream.
• Reduce expenses by auditing a year’s expenses, budgeting, and cutting down where possible.

2. Net Worth Calculation

“You can’t improve what you don’t measure.”

Net worth is the current location of your financial journey!

Net Worth = Assets - Liabilities

1) Assets: a. Financial Assets: SB, RD/FD, Mutual Funds, Bonds, PF, NPS, Stocks, etc b. Real Assets: House, Car, Jewelry, etc

2) Liabilities: Personal/Car/Home Loan, Credit card balance, etc.

Notes on liabilities:

• If you have liabilities apart from a home loan, closing them should be your priority because they compound faster than your investments.
• Negotiate & reduce interest rates or consolidate the debts with low-interest loans.
• The snowball method clears small debts first for quick wins, boosting motivation. The avalanche method tackles high-interest debt first, saving more long-term. Choose based on your situation and motivation style.

3. Protection

"Getting insurance is your responsibility to your family and loved ones. You may hate it, but it is your responsibility."

1. Emergency Fund: Around six months' worth of expenses, kept easily accessible and risk- free, such as in a sweep-in FD. Remember, Phone/Car/Vacation is not an emergency. This is sacred money for unforeseen expenses or job/income loss.
2. Health Insurance: Cover your dependents and get a personal plan even if your employer provides insurance because your job is not permanent and gets expensive as you age. You should get personal accident and critical illness insurance, too.
3. Term Insurance: It's the money your dependents need to comfortably lead their lives with the same lifestyle and meet all the goals in your absence. Since it’s difficult to calculate, a simple rule of thumb is to get about 10 times your yearly income or 20 times your yearly expense.

• Get a pure term policy till your retirement age with an annual premium. Buy online to save agent commission, and once you have achieved financial independence, you can stop the premium.
• The companies are regulated by IRDAI, so you can choose the cheapest option or base your decision on the claim settlement ratio. You don't get any money back if you survive the insurance period, but it's the price you pay for peace of mind that if you die, your family will be okay.
• Say NO to insurance-cum-investment products sold by your friend, colleague, neighbor, relative, or banker. Money back, tax-free, and bonus instead of "wasting the premium" are the keywords used. But the insurance coverage is pathetically small in these bundled products, and the returns are ~4%. (A staggering 35% to 80% of the first year's premium goes to the agent!). The day you can separate your investments from insurance, you have taken a giant stride toward financial security.

4. Goal-based Investing

"A goal without a plan is just a wish."

Goal-based investing differs from traditional investing in that its measure of success is how well you can meet your personal life goals rather than how well your investments perform against the market average.

Define your financial goals with a specific amount and time frame. For example, I want to buy a house worth one crore (today's value) 5 years from now.

Common goals include retirement, buying a house or car, vacation, and funding children's education/marriage.

Once you have your list, allocate existing assets, map ongoing investments, and invest any surplus toward your goals.

Wish it were that simple? :-) More on this later!

• Short-term goals: Stick to bank deposits
• Long-term goals: Direct equity requires your time and attention. Buy (index) mutual funds directly.
• Overall debt investment percentage should equal your age; start with PF.
• Real Estate: As an investment, it is high-risk, illiquid, and cumbersome to acquire and maintain. We love the physical possession to brag, "bought this for 50 lakhs, and it is now worth 1 crore", while the return is in poor single digits if you calculate the returns considering the years! Buy for consumption only.
• Gold: Buy jewelry only for personal use, as high making charges reduce its investment value, and physical gold comes with security challenges.

Notes

• FIRE (Financial Independence Retire Early) is a lifestyle movement where you save ~40 times your annual expenses and retire!
• Rent vs Buy: Android vs iPhone! Renting is cheaper and more flexible. But buying your own home is an emotion :-)
• Inflation & Compounding: Please understand these thoroughly.
• Beware of lifestyle creep.
• Earning more and maintaining a high savings rate is more important than chasing high investment returns.
• Review periodically since the goals and priorities evolve. And plan withdrawals as you get closer to the goal.
• Maintain two bank accounts: one for earnings & expenses, and another for savings & investments.
• Update nominations for all your assets, and make it easy for the family to find the info.