To get anywhere, you need a plan and the same goes for your financial future.

Unfortunately. a financial plan appears, to most of us, like a visit to the dentist

A Financial Plan That Works For Everyone

by Sanjiv Singhal 35 Comments Must Read, Personal Finance

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something to postpone until you wake up screaming in the middle of the night.

So we came up with a financial plan thats more like a visit to your favourite coffee

shop. It involves forming simple habits and takes less than an hour to start

implementing.

Investing, tax planning

1. Maximise your Employee Provident Fund (EPF) contribution. If your total contribution

(including your employers) to EPF is less than Rs 1.5 lakh, invest the difference in Tax

Saving (ELSS) funds. Your tax planning is done.

2. Invest 30% of your take home salary in diversified equity mutual funds. Never invest

directly in stocks. Schedule a SIP to automate this habit.

3. Got your annual bonus? Invest 50% of it in a 5 year auto-renewing bank FD. This is

your emergency fund.

4. Invest the remaining bonus in yourself take a course, travel, do fun stuff.

5. If you have a home loan, split the bonus 3 ways one third to prepay the loan.

Insurance

1. If you have people who depend on your income, then buy a 40 year term life

insurance plan at 25, then a 30 year plan at 35 and a 20 year plan at 45. Every time

make sure the total sum insured is 30x your then salary. There is no need to buy a life

insurance policy unless you have dependents.

2. Buy health insurance for every member of your family. Even if youre covered by your

employer.

3. Buy insurance for your car, your house and its contents.

4. Renew your insurance every year 1 month in advance.

Please note that I said buy not invest. Insurance is not an investment.

Loans

1. Only ever take a loan to buy a home. Never more than 75% and never longer than 15

years. Pay it off within 7 years. Yes, its possible.

Bonus tips

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1. Maintain a single no frills bank account and a single no frills credit card.

2. Set all your bills (electricity, phone etc) to auto-debit to your credit card every month.

3. Pay off your credit card every month in full. Set it to auto-debit your bank account

every month.

4. Contribute to charity your time is better but some money will do as well.

Congratulations! Youve just set yourself up for a comfortable financial future.

(This plan assumes you start earning at 25 and retire at 60. Other planning

assumptions are based on whats the norm in India. This plan does not cover a

transition to retirement and is most suitable for people below 50)

(This post was updated to reflect the changed tax rules in 2014)

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About Sanjiv Singhal

CEO of scripbox, Sanjiv has worked at the intersection of finance & technology for

over 22 years. Having held leadership positions with Citibank, ABN AMRO Bank &

Kotak Mahindra, Sanjiv set up scripbox along with his friends Atul & Ravi with the aim of

simplifying personal finance for everyone. You can also follow Sanjiv on twitter @sanjivsinghal

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V K 2 years ago

Concise and actionable, nice. Can you elaborate on the below:

Maximise your Employee Provident Fund (EPF) contribution. If your total contribution (including your

employers) to EPF is less than 1 lakh, save the difference in a Public Provident Fund (PPF) account.

Your tax planning is done and so is your allocation to debt

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scripboxblog 2 years agoMod > V K

Thank you VK. Let me elaborate.

There are two separate ideas at work here:

1. tax planning and

2. ensuring that you're appropriately allocating your savings into debt and equity.

Both EPF & PPF contribution is tax deductible under Sec 80C up to Rs 1 Lakh. If your total EPF

contribution is not 1 Lakh, and you want to avail the 80C benefit completely, you can invest the

difference in PPF which gives the same tax-free return as EPF and is similarly a safe government

backed investment.

Example: Total Salary = 10 lakhs, Basic Salary = 5 Lakhs, EPF = 60,000 (12% of basic from you).

Then you can invest 40,000 in PPF. And your tax planning is done.

Now lets consider the debt and equity allocation. The take home in the above example is about Rs

7.5 Lakhs. According to our plan you should save 30% of this in equity mutual funds - that would

be Rs 2.25 Lakh approx. So you are investing 1 lakh in debt and 2.25 lakh in equity or about 30%

in debt and 70% in equity. This is typically what is recommended. More important, this is what can

be afforded.

I hope this answers your question. I'll be writing a series of detailed blog post explaining the

concepts of the above plan. Please let me know if something else is unclear and I'll make sure we

clarify that with examples.

(example corrected based on inputs from Rahul Rajendran)

Sanjiv

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Rahul Rajendran 2 years ago> scripboxblog

Sanjiv,

A couple of small corrections to your example. AFAIK, only the employee's contribution to

EPF is exempted under 80C. Also, I think generally the employee's contribution is 12% of

basic. Nevertheless, this does not take away anything from your rationale regarding debt

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basic. Nevertheless, this does not take away anything from your rationale regarding debt

allocation! It's just that in the above example the person would have to invest a little more

in PPF to be done with 80C, than what you projected.

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scripboxblog 2 years agoMod > Rahul Rajendran

I stand corrected. You're right on both counts. Employer contribution is exempt

from Income tax so it cannot fall under 80C. I've corrected the example above.

Thank you very much.

Sanjiv

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ertf23 24 days ago> scripboxblog

This comment needs to be updated to reflect current situation

Reply

RK77 5 months ago

see more

Thanks Sanjiv for a simple, lucid financial plan that can be followed by most readers. I have a few

suggestions and different views on the following:

1. PPF+EPF contributions being restricted to Rs 1.50 Lakhs merely because anything above that does

not qualify for tax rebate is not good. Any salaried employee can save this amount in both PPF and EPF

I.e., a total of Rs 3.0 Lakhs per year. Tax rebate is restricted to Rs 1.5 Lakhs per annum but the taxfree

intersting of 8.75% compounded (Minimum 8% even if it is reduced in future) is assured on the total sum.

This is the safest investment that is better than any debt fund in the market. Any young person at 25 yrs

of age following this till his retirement at 55 or 60 years will have a tidy sum as a part of his/her core

wealth.

2. Those worried about the liquidity of PPF should know that after 5 years one can withdraw 50% of the

balance of the amount that was in account at the end of 3rd year. Also, in an emergency one can take a

loan from EPF, or against PPF.

3. Advice against investing directly in equities is not very sound as the returns from direct equity are better

than those from mutual funds considering the expenses of MF asset management company and the

commission paid to its brokers, investment advisers and so on. The cost of portfolio churn also adds to it.

Portfolio managers have to churn the portfolio as they have to pay out minimum expected returns and for

redemptions. Also, averaging of returns on stocks will never surpass the returns from a good collection of

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Vijay Sumanth 8 months ago

Very nice write-up. Really helpful. You mentioned, "Buy health insurance

for every member of your family. Even if youre covered by your

employer". Could you please elaborate what is the benefit in buying a

health insurance when one is already covered by the employer? Thanks in

advance.

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scripboxblog 8 months agoMod > Vijay Sumanth

3 reasons:

- The amount of cover provided by your employer is often limited

- coverage (amount and dependents) varies across employers

- Coverage is restricted to the period of employment

The last is important because even if you stay with the same employer all your life (unlikely these

days), you will still need Health Insurance when you retire. At that point you will have to worry

about pre-existing conditions and in some cases, the insurer could even decline coverage.

Reply

kjamuar a year ago

Hi! I am a 43 year old who has recently moved out of India. I do not have any PF or PPF account now

having encashed them earlier. Can I set up an account now? My salary comes in dollars and is non

taxable (I believe). My employer is not an Indian company. Pl advise

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scripboxblog a year agoMod > kjamuar

This plan is applicable to a resident Indian and not to a non-resident. For specific tax advice

please consult a Tax Advisor.

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Smita Mahesh a year ago

Just a point, we can increase our vpf portion of basic salary by 28%. So I fact all employee contribution

can be maxed to 40% of basic.

This way you can substantially save for retirement or home buying.

VPF can be reduced any time in year if need arises for repaying home loans or if one wants extra cash in

hand.

It's invisible and automatic route to gather very substantial kitty tax free.

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Ranjeet a year ago

Sanjiv,

You mentioned the sum of 30X of salary for insurance coverage...is that monthly gross or annual?

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scripboxblog a year agoMod > Ranjeet

It's annual salary.

The idea is to have the corpus generate an adequate alternate income stream (steady post tax

return) for the beneficiary. We don't assume a high return scenario for this because it's likely that,

given the circumstances, the beneficiary will opt for a conservative investment vehicle.

Do you have any alternative thoughts?

ertf23 24 days ago> scripboxblog

Well, if someone earns 10 lakh an year does that mean the insurance coverage should be

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Well, if someone earns 10 lakh an year does that mean the insurance coverage should be

3 crore? I wonder how would someone be able to pay a huge premium for that even if the

policy term is 40 years

Reply

Vikas 24 days ago

Thanks Sanjiv for this article. Any comment on NPS. How can we invest in it?

Reply

Jonathan a month ago

Mr. Singhal, Thank you for these insights. I am quite new to all this but am keen to get my finances in

order. I do not have any dependants, but true to layman advice, I bought a couple of life insurance policies

in 2010 and 2011 respectively. What would you suggest I do with these?

Reply

sudhin a month ago

Hi, it was a nice read.Why was it said to renew the insurance 1 month in advance?

Reply

scripboxblog a month agoMod > sudhin

So that there is no possibility of policy lapsing. Specially in health insurance, a policy lapse could

cause a big set back to the coverage of pre-existing conditions.

Reply

sudhin a month ago> scripboxblog

Thanks!

Reply

Ramgopal Natarajan 2 months ago

There is this perennial debate on ULIP vs Mutualfunds. In recent times, the costs of ULIP from top

insurance companies have come down to the extent of 1.4 to 1.8% over the period of the term of ULIP

(typically 20 yrs) and the returns are indeed compared, if not better, than mutual funds. Whereas the

mutual funds costs are 2.5 to 2.75% on almost all equity related funds. And the ULIP provide coverage as

well which is not available in a MF. What is your take on this? I invite comments from other readers as

well. Thanks.

Reply

scripboxblog a month agoMod > Ramgopal Natarajan

SEBI has a cap of 1.75% on expenses for larger funds and while the costs of ULIPS has come

down (only if purchased from the insurance company) it is still marginally higher than mutual

funds. We believe that buying a mutual fund and a separate term life policy continues to be better

than a ULIP.

1. It is difficult to compare the track record of ULIPS

2. It is difficult to exit a ULIP in case of poor performance because your insurance is also tied to it

Anand Kumar R 6 months ago

This reminds me of the "Worlds Simplest Porftolio" by Scott Adams :)

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This reminds me of the "Worlds Simplest Porftolio" by Scott Adams :)

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Lakshmi 7 months ago

You mention both PF and Insurance. Since both will come under 80C, I fear that there may not be any

thing left for PPF.

Reply

scripboxblog 7 months agoMod > Lakshmi

That's not a problem. What it means is that for these people there is no need to invest any more

money in PPF. The debt requirement for their plan is being adequately covered by other

instruments. Any additional surplus can be invested in Equity Mutual Funds.

Reply

Nagraj Shetty 9 months ago

Really Helpful for one to plan and move towards settle!

Reply

Ajinkya M 9 months ago

The article is pretty simple giving crux of "Financial Planning". It highlights important aspect of financial

planning very easily. Really Nice article and motivation for first time investor's.

Reply

Sonal R P 10 months ago

The article is really helpful.

But, I didn't find anything for short term requirements/goals. As your investment guidance for EPF/PPF

(locked for 15 yrs) and Mutual funds are for long term.

Regards

Reply

Smita Mahesh a year ago

Mr. Sanjiv,

Hats of to you for a very concise and very simplified way of money planning.

It's beauty lies in its deceptive simplification. All best things r simple yet difficult to follow.

It has helped me to set up few missing points in my approach. Also it gave me much needed boost in

morale that I was right in thinking and executing our family finances to most extent.

Thanks again.

I needed one small help. Are Ulips good strategy for children planning for a nuclear family without much

family support in terms of guardians in case of parents demise?

dhiraj 2 years ago

I have one query which is a bit distantly related to this article, so pardon me if its not appropriate.

With regards to Term Insurance, i have only bought ULIPs so far never a pure term Ins, so now that I am

inquiring about the premiums I find that per lakh premium from LIC term plan seems to way high

compared to rest of the players, specially the MNC ones (like Aegon, AXA, etc). Wondering why is that

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compared to rest of the players, specially the MNC ones (like Aegon, AXA, etc). Wondering why is that

and is there a catch here with lower premiums, like there is for everything cheap in todays' world? So I

wanted to know can i just go with the term provider with the cheapest premium on offer or is there sth I

am missing? Will be thankful if someone can enlighten me on this.

Once again sorry if this is not a relevant query for this forum. Pls feel free to remove if its not in line.

Reply

scripboxblog 2 years agoMod > dhiraj

I'm not best qualified to answer this and I hope others on the forum will provide their inputs too.

I asked a friend from IIM Bangalore Ajay Bansal who runs an Insurance Brokerage this question.

Here's what he had to say (Thanks Ajay):

- The pricing of terms insurance has nothing to do with the policy wordings. The policy wordings in

terms insurance is the same across all insurers.

- The New players are pricing it at a lower price just to gain a higher market share. However you

should avoid companies which have poor claim settlement ratio.

- Online term plans are usually cheaper than plans bought through an agent.

- IMPORTANT: While buying the policy provide answers to all questions carefully and truthfully.

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Dhiraj 2 years ago

Thanks. I am 37 now and personally I only got serious about investing 5-6yrs back. Since then I have tried

multiple things - ULIPs to start with, MFs, Stocks, PPF, Gold, Some real estate as well. Some of them

total waste (ULIP, Stocks) and some very productive (MFs, Gold, PPF). Anyway having done this as a

layman for a while I can vouch that your tips are very good and almost ideal for anyone to start with, rest

will come to you intuitive as you practice this.

Reply

Candid Camera 2 years ago

My salary is Rs 50,000.00 per month. How much tax will I be levied for 2013-2014? On tax saving, I have

my house loan which I pay Rs 17000.00 every month. I have taken an health insurance for Rs 500,000.00

and have paid an premium of Rs 5385.00. Apart from this, how much I need to save to avoid taxing?

Reply

scripboxblog 2 years agoMod > Candid Camera

I recommend that you consult a tax advisor for this specific guidance.

I'd also recommend that you don't plan your investments and Insurance for the sole purpose of

avoiding tax. It is possible that the amount you need to invest to secure your financial future

exceeds the amount required to save tax.

Reply

Gururaj 2 years ago> scripboxblog

Health Insurance is also a big liability especially after retirement therefore adequate funds

need to be made available for that.

Gururaj

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scripboxblog 2 years agoMod > Gururaj

Good point Gururaj. In fact with rising health care costs this becomes even more

important. And Health Insurance does not cover regular treatments.

Traditionally planners have assumed that your expenses drop to 70-80% after

retirement. In the above plan we've assumed 100% to provide for health care

costs.

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