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Money matters: This is the first step of good financial planning

Jun 07, 2017 | 3 years ago | Read Time: 3 minutes | By iKnowledge Team

What is the first lesson in driving school?

Answer: The clutch, the brake, and the accelerator pedals.

One helps you start the car, the other to stop during emergencies and the third to speed up.

When you start learning, you aren’t allowed to speed up. You remain in the first or second gear. This is until you learn the most important lesson—press brake at the right times and manoeuvre well.

Now let’s apply these lessons to your money.

You earn money. You save some of it. You spend the rest.

Clutch. Brake. Accelerate.

Initially, when you start earning, it’s important that you understand the concept of saving. It’s an inherent part of you managing your money well.

But no, saving is not just about keeping aside some money in the bank account.

The first step is spending your hard-earned money—on insurance. Here’s why:

Why plan your money?

Before you understand why insurance is the first step, answer this: Why do you want to plan your finances? Here are some common answers:

  • To be able to afford luxuries
  • To give your family everything they want
  • To give your child the best education
  • To have enough money even after retirement
  • To start your own company
  • To be prepared for emergencies

Dreams and aspirations are endless. And almost all of them need money. Unfortunately, though, to fulfil all these goals in life, simply earning is not enough. You have to set aside some money for the future. After all, it is today’s money that comes handy tomorrow.

So, what do you do with this money: You invest so that it grows so much that you have enough in the future. But there’s a key problem:

Let’s say you earn Rs 10,000 every month. Of this, you plan to set aside Rs 2,000 every month. You invest this in a lucrative option and earn a 10% return.

In the first year, you manage to invest Rs 24,000 (2,000 x 12). By the end of the year, it grows to Rs 25,081.

The second year, you invest another Rs 24,000. By the end of the second year, you have a little over Rs 52,670.

Now let’s say you meet an accident in the third year. The hospital bill costs you Rs 95,000.

In one shot, all your savings are depleted. Plus, you had to borrow money to fund the bill. You now owe people money!

Instead here’s what you could have done:

You invest Rs 1,000 every month. With the remaining Rs 1,000, you buy a Term life and health insurance. At 25, a Term Life insurance with Rs 1 crore cover only costs Rs 535 each month. At a similar price, you get a health insurance too.

Why insurance?

Your investments take time to grow. Even your income potential starts low initially. It is only in the late 20s and 30s that you start earning a decent amount to be financially independent. Your investments, meanwhile, take even longer to build you wealth.

During this time, the insurance can act as a safety net. At a small premium amount every month, quarter or year, you can have lakhs of rupees at your disposal—all because of your insurance.

And that’s why insurance is the first step of financial planning.

Build your safety net first. Learn to press the brakes at the right times. And then speed up towards your goals in life.

Insure your loved one’s financial future after you with a term insurance plan

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