"Rising Above the Middle-Class Struggle: Effective Financial Planning for Indians"

As I sat across the table from my friend Shweta, sipping on my chai, I couldn't help but notice the tired look in her eyes. "I just don't understand why we're working so hard and yet, we're barely making ends meet," she confided in me. And that's when I realized, Shweta was just one of the many members of the Indian middle class who feel stuck.

The same thought had struck me a night before as well, sitting across my bed after studying 2 hours straight for my CFA exams, I thought to myself, what am I doing? What's the use of all these if I'll always be a middle-class guy.

I was taught to believe that hard work and education were the keys to success. But as I am growing older & see all those who are in the corporate workforce, I realize that there is more to it than just working hard. The reality is, the Indian middle class is facing unique challenges that require a different approach to financial planning.

Financial planning as the name suggests, is the process of planning one's finances in the most optimal way, a way in which the plan suits one's risk tolerance & helps in attaining goals as well.

Financial planning isn't taught in schools, heck, it is not even taught in any college. The only way you're going to learn anything about financial planning is by searching yourself & most of the advice you'll find is crap & way too generalized.

In this article, we'll learn everything about financial planning & how to get your finances in control!

The Money Order

The first step in any financial planning is to get your "money in order", most Indians make the mistake of thinking they can track their money habits in their minds only! Stop kidding yourself, get an excel sheet & get your money in order.

Get all the sources of income you have, such as salary, pocket money or some other sources and start tracking it, yes, this simple step will put you years ahead of all your peers. (I'll provide you the excel sheet)

This excel sheet will help you to understand yourself, understanding where you spend & how much and also it will give you a sense of control over your life.

This step is the most crucial in this journey, do not ignore it! Get the excel sheet from my profile & use it efficiently, do not ignore this step, as the great Jim Rohn said: "What's easy to do is also easy to ignore".

Money Buckets

The second step in your financial plan is to create what I call "Money Buckets". Think of your financial life as different buckets, each bucket serves a purpose & you need to understand the purpose behind each one.

This serves 2 purposes; one it gives you a sense of direction, second, it helps you in avoiding mental accounting.

Now all your savings & investing activities will serve a purpose, you won't be bogged down in confusion & you'll have something to save for & invest for,

Your goal is to separate out money according to its function so the brain is better able to map it, I personally prefer separating my money in 3 parts:

1. Salary Account
2. Spend it Account
3. Invest it Account

Once your salary hits your account, allocate it to the other two accounts. Keep a few thousand in salary account too. This exercise will not make you feel guilty for spending your money. You have successfully built money buckets.

Each bucket serves its purpose, spend it account is for your household & personal expenditure & invest it account serves as your savings & investment corpus.

The goal with this exercise is to get the best cashflow system for your personal finances.

Your Emergency Buffer

Before I even dive into talking about investment & insurance products, its super necessary to talk about something that most Indians ignore: "Emergency Buffer".

Emergency buffer as the name suggests, is your corpus which will be used in an emergency, it might sound to be pessimistic & old fashioned, but we all know what happened during COVID-19 & the recent layoffs.

The goal of this bucket is to have a safe harbor if something bad happens to you or your loved ones, this safe harbor should be in the form of short-term bank FDs, some people prefer liquid & money market funds but I'd suggest you to go with a bank FD.

As a rule of thumb, keep at least 6 months of absolute necessary living expenses in this bucket. Your Netflix subscription, Starbucks coffee budget won't be included in this. Add only those expenses which are necessary for you to survive for at least 6 months.

Now that we have an emergency bucket in place, let's talk about the most important aspect of personal finance.

Health Cover

"I remember my friend calling me once to lend him ₹1,00,00/ ASAP, I asked him what's the matter?" He quickly told me about how his sister got hospitalized & now they're arranging the funds for her treatment.

Medical emergencies happen in split seconds & if we are not prepared then they can wipe out your savings. The best way to avoid such happenings is to get medical cover, especially when one is young. (Early 20s)

There is a reason why medical cover should be purchased in early 20s only, the first reason is that you will pay lower premiums & you'll get a lot of additional benefits too. When you are young & healthy, you'll have many options for your medical cover. A person who is old & unhealthy will pay a hefty premium.

So, get yourself medical cover today!!

Get Insured

No, it's not time to get into the market yet, get insurance first!

And yes, insurance serves a different purpose than your investments, Wikipedia defines insurance as:

"Insurance" is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of "risk management" primarily used to "hedge" against the risk of a contingent or uncertain loss.

By this definition, it should be clear to you that the role of insurance is to reduce the risk & not to create wealth. Indians have this mentality where they mix insurance and investment & look for benefits of both insurance & wealth creation in a single product.

Mainly there are two main insurance policies:

1. Term Life Insurance
2. Whole Life Insurance

I won't be talking about each one in detail in this article, but most people should opt for a term life insurance policy. So, get insured today before you jump in the market.

Let's Invest

Now, the fireworks shall begin, we are finally ready to invest. We have learned that investing is only a part of a financial plan & not the only process. So, how should you invest? How should you go about in the market?

If you're not a CA or CFA, then getting directly in the market can get difficult & you may lose your hard-earned money too. So, do this first in the market:

1. Start investing in Index funds, Index funds are best suited for those who are long-term oriented & don't want any fuss. (I'll write in detail on Index funds in some other article)
2. Educate yourself, the financial community don't want you to stay independent, they want you to pay high broker fees & high fund management fees. The only way to avoid this is to educate yourself through:

• Reading Books
• Courses on our channel
• My LinkedIn profile

As a rule of thumb, invest at least 10-20% in a low-cost Index fund of your choice, till you educate yourself on equity research &b valuations, you should begin with Index funds.

Putting it All together

We have seen how important it is to get your finances done in an excel & not in your mind, the importance of buckets, health insurance, life insurance & then investing.

Now in the end the only thing required is to get your hands dirty & apply these, remember no investment advisor will do this for you!

Investment Advisors can only advise you; the actual work will be done by you!

I hope you learned something new; I'll see you next Saturday!

Peace out!