"Failing to plan is planning to fail" goes a popular adage. It really underscores the importance of planning in our everyday lives. The dream of leading a financially secure life cannot be fulfilled without proper financial planning. Here we shall focus on the basics: savings, insurance and investment.
Savings
Emergency Fund
Set aside an amount equivalent to 6 times your average monthly expenses as a reserve emergency fund in a savings bank account. This should serve as your safety net and backup against unfortunate contingencies and help you tide over any temporary but sudden cash flow crisis.
Standby Fund
Deduct emergency fund from your average quarterly income and put the surplus in a bank fixed deposit or liquid / ultra short-term debt mutual fund. These mutual funds are relatively safe and provide marginally better post-tax returns than a traditional fixed or recurring deposit. This amount should be treated as a second line of defense to be used under extreme circumstances only, where the emergency fund falls short of requirement.
Insurance
Life Insurance
If you are the family's breadwinner and have financial dependants, consider having a pure life term insurance cover worth at least 10 times your annual income. Sum assured should be liberal enough to cover inflation-adjusted living standard expenses and liabilities of your dependants until the time they become completely self-reliant.
A term insurance is the cheapest form of life insurance which pays out the sum assured in case of death but does not have any maturity benefits. For a given sum assured cover, the premium of a term insurance plan is substantially lower than that of any insurance-investment combination plan e.g. unit-linked insurance plan (ULIP), endowment plan, moneyback policy, etc. Such products mix protection and investment but fail to provide the best of either of them. Their insurance coverage is rarely adequate to protect dependants against the risk of breadwinner's untimely demise and also their effective returns are lower due to high charges. Hence treat your insurance and investment needs separately and never mix them up.
Health Insurance
Given the high cost of medical treatments these days, opt for a health insurance policy to take care of unexpected medical expenses. Be prudent in your selection of the sum assured so that the cover does not turn out to be inadequate. Buy your own policy even if you have a group insurance cover from your employer. This would ensure that you remain protected at all times even in case of job loss or during the transition period of switching between jobs.
Investment
Essential
Your core investment plan should be geared towards achieving specific financial goals in a desired time frame. Implement that plan by investing the discretionary income (left after deducting all other living expenses, loan and debt payments, etc.) in a portfolio well diversified across various asset classes as per your risk tolerance.
Optional
If you are one of those savvy investors who understand financial markets and are willing to bet on short-term trends fully aware of the extreme risks for higher returns, consider keeping 5 to 10% of your investment capital available for direct trading in stocks, derivatives (futures & options) or any other investment opportunity in which you might have a strong conviction.
Summary
Savings, insurance and investment are the basic building blocks of personal financial planning. A comprehensive plan also takes into account the impact of inflation and taxes. But, you should not blindly invest just for the sake of saving tax either. At times, depending upon your income tax slab and financial goals, it is more sensible to forego investment in a particular tax-saving or tax-deductible instrument while replacing it with an alternative product to generate better tax-efficient returns. Your primary focus should always be on beating inflation with superior post-tax returns for long-term wealth generation.