Disclaimer: I am not a financial expert but what I have understand by reading few books on financial issues. I would like to share with you.
Every Indian in 2016 is trying hard to get out from low financial situation. In average, Indians are majority of Middle class who is trying hard to get out from this loop of ever poverty cycle. Now, during my read of the financial books. I learned that financial protection of middle class is horrible in India.
What is Financial Protection for Middle class people?
Well, This answer can be given by an example.
Surender is a middle class men who earned lets say 30,000 Rs/- Month and 3,60,000 Rs/- Yearly. which is very minute. He is the only person who run his family of 2 parents, 1 child and wife including younger brother. Now, here is some horrible situation of his financial life.
He saved his money which is almost 18,000 – 20,000 Rs/- after deducting monthly expense. Now he know only traditional method of saving like Fixed deposited, Public Provided funds, LIC and ULIP funds. he distribute his salary 40% in Fixed deposited, 40% PPF and rest in different LIC and ULIP (20%). Now lets check his financial growth and life from today. (lets suppose his age is 28 now and he will earned up to 58 yrs.)
Fixed Deposited: 8000 (40%) x 12 month x 10 Years= 14.8 Lac x 3 decade = 44 lac(not included 7% Rate of inflation)
PPF : 8000 (40%) X 12 month x 30 years = 98 lac (not included 7% Rate of inflation)
ULIP & LIC : 4000 (20%) x 12 Month x 30Years = 14 Lac (not included 7% Rate of inflation)
Hence after completing his financial life. he will get only – 1.56 CR after spending 20,000 per month religiously.
Now, Lets move to some basic question:-
What if he died due to accident of any point of time?
What if his family member has to face medical emergency at any point of time?
What if he and his family member diagnose with critical disease ?
Big Question? Will he will be able to survive his financial goal. Is his goal depend on certain condition like immortality to him and his family. which is a big flaw.
I think he is planning religiously but it has major and dangerous flaw.
How his planning should be? how he can protect his family and earned more just than 65 lac?
Well, Lets move to another situation.- 3 way of Saving-Security, growth and protection
Lets say Surender planned to distribute his monthly saving in three part.
21.25% Monthly for security from his salary.
55% Monthly for growth from his salary
23.75% Monthly for Protection from his salary.
Security of his life and family.
Surender decide to buy health insurance plan (i.e. 5 Lac sum for critical illness + hospitalization charge for whole family). General charges for full cover is 17000 rs/- Yearly and full floater planed for Old parents can buy up to 26,000 /- Yearly. (in India)
Now, Total expanse of Health insurance will be in 27 years for family: 4.59 lac (Non returnable) and parents (15 years more if age is near 55 years): 3.9 Lac.
and a Term insurance plane of 1 Cr. which is 11000 including accidental befits will be 2.42 Lac (up to 50 years)
Total expanse: 10.91 Lac but complete no expanse of family of health up to 27 Years and 1 Cr. money cover in case you get death.
Now, Surender expanse yearly in this will be 51,000 which is 14.16 % of years.
lets say he has to pay monthly 4250 which is actually 21.25 %. Please mind this is non returnable amount from your earning but extreme important if you want to see your family healthy.
** These charges are subjected to age of entry and condition of people. it can be reduced more.
Its recommended, to buy health and term insurance at very early age.
Growth of your money.
Now after security of family: lets say now you want to know what next: Growth of your money.
Its an important part you want to growth of your money: lets say you saved your money in Mutual funds:
You decided to save 45% of your saving in all above mentioned schemes. Lets say you dissect this 45% into 3 part:
45% of your Monthly salary is 9000 rs. Now see.
Mutual funds: 11,000 rs X 12 Month x 30 Years = 1.17 Cr (More than Traditional saving after including rate of inflation as 7%)
** Mutual Funds are subjected to market risk.
Mutual funds are considerably growing with rate of 23% each years after 2000. and its suppose to be grow similarly up to 2035.
Protection of Financial life.
Well In this section we can use traditional way of saving so we can use them as emergency funds and other things to do.
lets say Balance 3000 rs Surender deposited in Fixed deposit: so he will get
Fixed deposit : 4750 Rs. X 12 months = 36000Rs X 10 years = 8.36Lac x 3 decade = 25.8 lac
Fixed deposited can be used for protection money which should be free from market risk as a emergency funds.
|Area of concern||Traditional way||New way (3 step)|
|Growth||Yes (20,000/- per month bring 1.56 Cr in 30 Years)||Yes (11000/- Per Month bring 1.17 Cr in 30 Years)|
|Financial protection||No||Yes (4750/- per Month brings you 25 lac more without threat of market meltdown)|
If you monitor this closely in same salary a person of earning 30000/- per month up to 30 years almost same equally but what new way of saving do, its almost eliminate the treat of financial crises in your life.
And I think this is the most important things in everyone life: security of our loved ones after over life or with our life.