Thursday, July 25, 2013

What is the Best Gift You Can Give Your Family?


What is the best gift you can give your family? A new Car? An awesome vacation in Europe? A new diamond necklace for your beloved? A new PlayStation for your son? The list is endless. However, this isn’t what we are talking about here...

We all work very hard and try to save up money for our future, our family's future and retirement. In many cases we are the only bread winner for the family. With women going to work more & more, the % of families where the Man is the only bread winner is coming down by the day. Anyways, this article can be suitable for any individual who is gainfully employed and has a family...

So, What is this Gift?

This gift isn’t that simple. If I have to summarize it in three words the gift will be

"A Safe Future"...

So, how can you ensure a safe future for your family when we are around and even after we are gone? That is what this article is about!!!

Idea No. 1: Keep Debt to the minimum (Preferably Zero)

This could probably be the biggest gift you can give your family & survivors in the unfortunate event of our demise. Imagine the mental & psychological stress our family will be after our demise. To top it all off, imagine how much more harder it would be for them to repay debt that we did not repay yet. Even if we don’t leave them a million dollars in inheritance, at least we shouldn’t be leaving them with debt to repay after our time. Isn’t it???

So, what can we do to keep our debt to the absolute minimum?

Tip No. 1: Always choose higher monthly EMIs over longer durations. A 5 year loan at Rs. 5000/- per month looks more appealing than a 2 year loan with a Rs. 15,000/- EMI per month. However, the lower your tenure the lower the loan amount remaining with every passing month...

Tip No. 2: Always choose to opt for the Insurance coverage that comes with loans. Most banks these days ask if you are willing to sign-up for insurance to attach to the loan. If they do, don’t refuse. The few hundred rupees fee they collect for this would definitely be worth it in case anything unfortunate happens to us. The bank will use the insurance policy to cover for our outstanding amounts and will not disturb our family.

Tip No. 3: Always choose to opt for the credit protection plans that come with Credit Cards. Most credit card companies these days have credit protection plans that charge you something like 0.1% of your outstanding amount to cover for the payment in case anything happens to us. So, for a 10,000/- rupees statement outstanding on our credit card this will work out to something like Rs. 10/- and in case anything happens to us, the credit card company will claim this from the insurance and will not trouble our family

Idea No. 2: Buy Pure Term Insurance Policies to cover at least 10 years’ worth of your annual salary as Maturity amount

This is pretty straightforward. I have always been supportive of pure term insurance policies because they give the most bang for the buck we pay them. For ex: Rs.10,600/- per year could get an insurance coverage of 1 crore for a non-smoking 30 year old person. This investment may sound like something you will never get back but think this way, if you are to buy an insurance policy that actually gives you the same 50 lacs at maturity (after 25 years) you will need to invest approx. 2 lacs every year...

Pure term insurance policies are the best for risk coverage to ensure that our family has adequate financial backing in case of an unfortunate event.

Note: The example premium amount was taken from an online quote for pure term life insurance policies. The policy is a 30 year term where I pay this amount every year and if anything happens to me in the next 30 years, my family gets 1 crore.

Idea No. 3: Start Saving for your Retirement TODAY!!!

Most of us (Including me) have been working for many many years and always dream about starting to accumulate money for our retirement. The sad truth is, even after almost a decade of being employed my retirement corpus isn’t something I can be proud of. Unfortunately this is the case for almost everyone. We work hard to make ends meet and by the time we can think about saving for retirement we are just a few years from retirement and end up with not much or even no retirement corpus. This should not happen to us. Decide and start saving up for your Retirement.

There is a whole series of articles in this blog that cover topics like why we need to plan for retirement, how much money we will need, how to save up that money etc. You can read it here: Retirement Planning Series

Let us all decide to act on these 3 Idea's explained above and try to give our family a safe and secure future!!!

15 comments:

  1. Nice article. Good blog. Keep it up

    ReplyDelete
  2. Please check up on tip no. 3 - credit protection plans. The credit protection is only for the minimum amount due and not the entire balance. Or maybe it differs from card to card.

    ReplyDelete
    Replies
    1. Hi Kiran - Yes it differs from card to card but it also depends on how much premium you are paying. If the monthly premium for credit protection is a % of your total outstanding balance the protection will be for the entire amount. If you are paying a % of the minimum amount due then the protection will be for the minimum amount due.

      Most banks prefer you to choose the protection to cover your total outstanding to minimize losses on their side.

      Anand

      Delete
  3. Nice article Anand, one issue which is there in my mind since long is - what is more appropriate - if you have a plot of land and around 2000K for construction - to construct a house, live balance around 5-10 years in it and then leave it for family OR - use the interest income of the cash in hand to pay rentals and leave the corpus and the plot for the kids to build as per their choices ?

    ReplyDelete
    Replies
    1. Charan,
      The value of land does not diminish just because you have built a house in it or not. Similarly I dont think the interest income on this money will match your needs in terms of rentals you pay etc. Constructing a home for yourselves and your family is always a good idea. If you already own a home and are thinking like this on the 2nd home then it may be a good idea but if you dont own a home yet I would suggest option 1...

      Anand

      Delete
  4. "Always choose to opt for the Insurance coverage that comes with loans".

    Taking insurance is good. However, it is a better idea to take an insurance outside on your name. If insurance is taken by the bank, all the money will go to clearing home loan account. However, as time passes the pricipal comes down. Hence, if one takes interest on one's name, the dependents will be left with some money(proceeds-remaining amount to be paid back.

    ReplyDelete
    Replies
    1. Most banks clearly mention that these policies are one-time premium payment policies for a certain amount (equiv to the loan you take)

      External policies are good that you get extra money but you need to keep paying the premiums regularly. At the end of the day - benefits will always equal to the premium you pay.

      Anand

      Delete
    2. Hi Anand,

      Can u please provide some details about House insurance v/s Society insurance.

      Delete
    3. Anonymous,
      What do you mean by Society Insurance??

      Anand

      Delete
  5. Thanks Anand. Your entire set of articles is very interesting. Please keep this going on....

    ReplyDelete
  6. There are many plans/policies for you and your family like fixed deposit, PPF, LIC, Mutual Fund. But investing in mutual fund is somewhat risky so read the documents carefully before investing in it. Investing in mutual fund through SIP is also a good option.

    ReplyDelete
  7. Hi Anand,
    I dint declare the HRA and tax is been played already.Can I submit the rent receipts and medical bills during IT return filling??.

    ReplyDelete
  8. If if I take a second house and have my son as co-owner and co borrower then in that case will it be considered as second house or 1st house self occupied in respect of my son and can i claim tax rebate on the entire interest of the loan or only notional loss as in case of deemed let out property.

    ReplyDelete
    Replies
    1. As far as I know, one person can only claim tax benefits on one self occupied property. If two people are co-applicants to a loan and own the house jointly, they have to share the tax benefits. If this 2nd house is your son's first and he wants to claim the self-occupied benefits for his half, and for your half would be considered as rented out and a notional rent has to be taken into consideration for tax purposes.

      Delete

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