Personal Finance

8 Personal Finance Health Checks

Financial Health Check

Anyone who works in the computer industry would have heard the phrase “Garbage In Garbage Out”. This holds true for our financial lives too. We can live a healthy happy life after retirement (output) only if we save and invest (input) during our working life. This applies to all of us – FI/RE pursuers or not. I believe that all of us should educate ourselves about personal finance and take control of money, rather than let money control our lives.

Personal Finance Essentials

I have mentioned items in their order of importance. For me, having an emergency fund and a life insurance plan are paramount. All other items should be looked only after these two are available.

Financial Folder

I read about this first on Jagoinvestor. I believe this is essential for everyone, but especially in cases where the spouse does not take active part in financial planning. This folder will ensure that none of the work you have put in (insurance, investment planning, withdrawal plans) will go to waste. It will also ensure that all details of your financial life are easy to hand – extremely helpful in painful situations where the family has to deal with death of the breadwinner.

Emergency Fund

Emergency fund is one item that has both supporters and detractors. I for one firmly support having an emergency fund. This is especially essential for families for whom monthly cash flow variation is high.

Life Insurance

I consider life insurance to be even more important than paying off debt and that we should not even compare these two, since insurance is protection whereas debt is an expense. I believe that online term insurance is the best option available in this space. We have individual term insurance plans for each of us.

Managing Debt

My first advice here would be that you should not incur debt unless absolutely necessary. Education loans for a degree from a good institute is one example where it is justified. But borrowing to buy a car just to satisfy status/prestige based desires is not a good financial move. But life is what it is and most of us would have some EMI or the other draining our earnings. The general advice here is to pay off high interest debt first. This would ensure you pay less interest overall and when that loan is over it leaves you more money towards other loans or investments.

Investment Planning

I debated with myself on which should be a priority – investment or expense planning. I went with investments since after a point you cannot derive significant incremental benefits from tracking expenses. Tracking investments on the other hand can generate significantly more returns due to the power of compounding. Another important aspect in tracking investments is to ensure you are on track towards your financial goals – whatever they might be.

Freefincal has numerous excel templates that can help in tracking your investment. This site is a goldmine for resources in identifying and tracking Indian Mutual Funds.

Understanding Expenses

If you are serious about increasing your investment potential, tracking your expenses is important too. The initial couple of years would provide significant benefits as you identify and try to eliminate habits that do not fit into your life plan. Tracking in the later years is just to ensure lifestyle inflation does not creep in and you stick to your plans.

Health Insurance

All of us who are salaried workers will have some form of health insurance from our employer. Unless you work for a government organization, it is best to have a plan ready when you retire. Health costs have the highest growth rate of all expenses. And health risks are unpredictable. Ensure you are more than adequately covered so you can enjoy life after retirement.

Withdrawal plan after retirement

The final piece of the puzzle if to have an asset allocation and withdrawal plan after retirement. This is to ensure you have modeled possible risks and uncertainty into your retirement plan. Peace of mind is most important after retirement and having a proper withdrawal plan is vital to guarantee this.

Financial Health Check      Is your health check Green or Red?

Is the FS Family Healthy?

We have most of the items of the financial folder ready. Some of the details like Mutual fund details are stored online since that is easier while passwords and account numbers are in physical form. The most important items missing are instructions to redeem investment and our individual wills. I am yet to even discuss this with Mrs.FS.

We already have our emergency fund ready and as mentioned earlier also have term insurance plans. Fortunately, our parents paid for college, so we did not need to borrow. We paid cash for our car – much less car than we can afford – and do not plan to buy a home for now.

I track our investments diligently. We are invested in 8 stocks and 4 MFs and it takes  5 minutes to track them. We do not track expenses in detail, but have a nominal yearly budget and ensure that our expenses are within that. We are pretty happy with our savings rate and do not see ourselves tracking detailed expenses until we want to increase that.

As mentioned in numerous other posts, we are 10 years away from retirement. Our current portfolio is a fraction of what we think we will need. For now, we only have a plan of how we want to invest and reach our target retirement number. As we move closer to retirement – around 5 & 2 years prior – we will start planning our withdrawal strategy and revisit our asset allocation.

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2 Comments

  1. I committed a blunder by buying a new car on financing. Oh well, I was young and reckless. Good thing was I paid it off in a couple years which was 3 years early. Bought my wife’s car used and paid it off within the year. Being here in US and that too in a remote location, we needed the two cars.

    On another note, we track all of our expenses with Personal Capital free tool. It is a pity that it doesn’t work in India. It is the most painless single platform to track 401k, investments, cash. debt and expenses.

    1. Read about your experience with buying cars on your blog. I guess all of us are allowed a couple of strikes. 😉
      There are a lot of financial tools that are available in the US – Personal Capital, Betterment, Vanguard (though it is a fund)… the list goes on. There are a few tools that are coming up in India for tracking expenses, though I am yet to try any of those. To be honest, we are concentrating more on the investment side of FI/RE than on the expenses piece of it. We do not have any big expenses that we can reduce, and at this point for the same effort can get more benefit from investments than tracking expenses.

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