Financial Planning for NRIs/PIOs/OCI

Ever been in this dilemma? Well, you need financial planning then….

No worries but…. We all had been through this in some point of our life, till we decided to plan…financially.

Financial planning now a days is a widely discussed topic among all the age groups, income groups across the geo and demographic concentrations. There are so may copybook definition of financial planning. Like Investopedia say;

A financial plan is a comprehensive statement of an individual’s long-term objectives for security and well-being and a detailed savings and investing strategy for achieving those objectives. A financial plan may be created independently……

In either case, it begins with a thorough evaluation of the individual’s current financial state and future expectations.

Some others say;

Financial Planning is an ongoing process to help you make sensible decisions about money that can help you achieve your goals in life; it’s not just about buying products like a pension or….

According to some;

In general usage, a financial plan is a comprehensive evaluation of an individual’s current pay and future financial state by using current known variables to predict future income, asset values and withdrawal plans. This often includes a budget which organizes an individual’s finances and sometimes includes a series of steps or specific goals for spending and saving in the future. This plan allocates future income to various types of expenses such as rent or utilities, and also reserves some income for short-term and long-term savings. A financial plan is sometimes referred to as an investment plan, but in personal finance a financial plan can focus on other specific areas such as risk management, estates, college, or retirement.

Sounds too big or complicated ? Let’s break it down…….

Financial planning is simply the way to be financially prepared for your future life events.

Sounds fare? Ok…. now let’s think about some possible future life events….

May be like the ones mentioned below:

A dream vacation
Marriage
Buying your first property
Child’s education
Your retirement,

Or maybe (God forbid) unforeseen emergencies even.

Now, if you see, these events can easily be categorized in two basic groups based on time horizon.

How about these?

Near-term life events:

A dream vacation
Marriage
Buying your first property
Emergencies

Longer-term life events:

Child’s education
Retirement (from work-life, not from life)

Have you ever heard this …?

So, we need some kind of plan to be FINANCIALLY PREPARED for these upcoming life events…. agree…?

Let’s get going then……

Steps of Financial Planning

Step 1 : Set a goal

Hang on……don’t freak out……. setting a goal is nothing but putting a timeline to your dream…. yes…. that’s it. How to achieve the goals is a different question all together. No worries, we will find the answer for that question too…. But, for now let’s convert all the dreams into goals first.

Do you see the difference?

Mere wishes have now become definite goals which calls for some actions…

Step 2 : Assign a budget to each goal

Now that we have created specific financial goals for us, it’s time to estimate that how much it is going to cost us to fulfill these goals for ourselves and our families and closed ones. The concept here is the “Present Cost VS. Future Cost “, that’s basically the inflation related to that event. Yes, inflation rates are different in different cases and if we just take a generalist approach while taking an inflation rate, our calculation for future cost of a life event may go wrong putting the success of the whole planning at risk. So, for retirement planning we may take the general inflation rate into consideration while we need to apply the educational inflation rate while planning for child’s education or lifestyle inflation when planning for their marriage. Whether or not we will be invited to their marriage that’s a different consideration altogether………. bad sense of humor but you got the point of inflation…right??

Now, if you do a little bit of online R&D you will have a fare idea about these inflation rates and how to calculate the FUTURE COST OF THE LIFE EVENT you are planning for. Once you know the future cost and the rough timing of the event it is very easy to calculate how much you need to save every month to be financially prepared for that life event. There are so many tools available in the market…simply pick up a SIP CALCULATOR, input the amount you want after a certain period of time and the expected rate of return, it will give you the amount you need to start saving now.

Let us take an example of a financial planning for child’s future to understand the concept in little more detail:

It’s ok to be confused sometimes…. let me explain it to you………

In this example, we are planning for a 2 yrs. Old kid and we are so good as parents that we are not only planning for his/her (equally costly) education but also for the marriage. We have taken a reasonable EDUCATIONAL INFLATION rate of 9% and WEDDING INFLATION rate of 7%. We are also expecting a 12% kind of annual return since we are going to invest into mutual funds and we have pretty long-time horizon available with us. Now, please note this rate is just an estimation of return, only for the purpose of understanding the concept and please don’t come back to me complaining if you get something less than that…………….just kidding…!!

It shows, the kid is going to need about INR 4.6 lakh after 13 yrs. from now, another 7.28 lakh after 15 yrs. from now, around 60 lakhs for his/her graduation after 16 yrs. and another 84 lakhs for his/her Post-Graduation after 19 yrs. These future costs are calculated on the estimated present cost of the education which is 1.5 Lakh for 10^th, 2 lakhs for 12^th, 15 Lakhs for Graduation & another 15 lakhs for Post-Graduation.

The calculation also shows that how much you need to start saving now to meet these future expenses time to time, about INR 26K/pm. Looks way too much?? Don’t worry, just start with whatever amount you are comfortable with and gradually increase it over the time. The good news here is your income is also going to increase over the time and so is your saving capacity. Bit relaxed…?? Good…. just don’t delay it. Start with your comfortable amount as early as possible for you. How….?? Simply pick and choose few of the good funds and start SIPs. 3 to 5 SIPs are good to start with……Please feel free to ask for advice if you want to know more or need help starting these SIPs. Just start. Oh yes, you can follow the same rule for the marriage planning also.

Step 3 : Protect your investment

Step 2 & 3 can be interchanged sequentially…… up to you.

The idea is not to touch the regular savings and investments in case of unfortunate events like medical exigencies or even your absence. Simplest way to do it is to PURCHASE HEALTH & TERM INSURANCE POLICIES, immediately. If you have not done it already then, the best time to buy an insurance policy is as soon as you come to know about the need of it.

One very important point, NEVER EVER MIX YOUR INSURANCE WITH YOUR INVESTMENT. Buy ONLY HEALTH & TERM insurance for protection. Don’t end up buying in some endowment or money-back policies thinking it is an investment. It is the most common way we mess up our investments and financial planning. I’m not against any specific kind of product lines but INSURANCE IS INSURANCE & INVESTMENT IS INVESTMENT. Here are few guidelines,

Buy health insurance separately for yourself and your family in even if you are covered under any group scheme from your organization.
Take additional riders for disability and critical illness.
Take adequate amount of term insurance so that your dreams are alive even in your absence.

Consider economic value of pending work-life approach to arrive at required insurance amount.

Always declare your all sensitive information while taking the insurance like your smoking and drinking habits, past illness or may be even any professional hazard. Always insist on buying the insurance as NRI, if you are one. Don’t forget to ask for and fill in NRI questionnaire.
Keep a track of the renewal dates.
Buy the insurance as expenditures and not investments.

PAY FOR THE INSURANCE & PRAY THAT YOU NEVER GET TO CLAIM….

Step 4 : Choose the instruments, carefully

This one is a crucial part for the overall success of your financial planning. After having defined specific financial goals corresponding to some of our future live events, having estimated the future costs for the fulfillment of those goals, also having protected ourselves and our families against unforeseen events……it is time for the real actions. Actions that needs to be taken at the earliest to start our journey towards the fulfillment of our dreams, be it a comfortable and early retirement, child’s future planning or may be preparing for an exciting vacation ahead.

The success of these journey largely depends on the wise and right choice of the instrument of investments, monitoring and improvisation and most importantly CONSISTENCY. A big no of people ends up compromising on their dreams only because of lack of discipline and consistency in their investments. So, the last thing we should think of is to break the regularity in our investments.

There are several investment options available in the Indian market. We are going to stick to very specific and selected means. Too much diversification in the asset classes may add to confusion more than helping in our journey. As we have already segregated our future life events into two major categories viz NEAR-TERM & LONGER-TERM life events, we shall similarly choose SHORT-TERM & LONG-TERM investment plans to prepare for those time bound life events. Though the risk bearing capacity plays a big role in the selection of investment instruments, still it is always advisable to choose low yielding but fixed return investment products for your NEAR-TERM goals and high yielding but variable return products for your LONGER-TERM goals. Typically, anything below 2 yrs. can be considered as Short-term, 2-5 yrs. as Medium-term and beyond 5 yrs. as Long-term. It’s just a general guideline though and dynamic in nature. It also depends on your risk appetite and understanding of the financial instruments and overall financial market.

Let us understand the concept of linking specific time bound life events with specific types of investment instrument with the help of this illustration:

Step 5 – The Final step : Start your investments, now..!!

Now, we are done with the planning part and it is the time for execution……

Log into your bank account and start recurring deposits of book a fixed deposit if you are investing for a Short-Term goal.

Log into your investment account and START A SIP TODAY in some debt or balanced mutual fund or do a lump sum investment in some liquid funds if your goal is a Medium-Term one.

Log into your investment account and START A SIP TODAY in some well diversified equity mutual fund or do a lump sum investment in some good large cap mutual fund in case of Long-Term goals.

Want to know which are the good mutual funds to start with…….??