PRIVATE: ESSENCE OF FINANCIAL PLANNING

Ram & Shyam, the two persons having the same age, skill set, education and financial background joined a factory in a similar position in 2015 on contractual basis with the same salary. They were not covered by any social security schemes and other benefits from the employer. Both were married and had dependent children.
Case1:
Ram used to spend the money as per his needs. In the remaining salary, he used to diversify the investments in PPF, NPS, Mutual Funds and some portion of his earnings in health insurance and other government schemes like APY, PMSBY & PMJJBY. In the year 2020, he constructed the house availing the benefits of PMAY & loan from a nationalised bank. He took 80% of amount loan from the bank and the rest of the amount he managed through his savings and investments. He insured his loan amount that would cover his debt and pay off his financing institution in case any eventuality. His house was also insured against a wide range of perils, namely Fire, Natural Catastrophes, Impact Damage of any kind, Riot, Strike, Malicious Damages and Acts of terrorism etc.

Case 2:
Shyam used to save only a little amount of money. Because of lack of financial awareness, he did not plan for any kind of investments and insurance. In the same year 2020, he constructed the house (same cost as that of Ram) availing the loan of 100% amount from a money lender at higher rate of interest. He didn’t insure his house (property insurance).
Due to natural disaster in the area, both the houses collapsed and Ram & Shyam died. But their dependent family members were safe.
The dependent family members of Ram availed life insurance benefits and they were not asked to pay the house loan EMI and also the insurance against the property was settled by the insurer. The dependent wife was provided APY & NPS benefits as per the rules. To some extent, the dependent family members availed the financial freedom because of the financial planning of Ram.
Due to lack of financial awareness and nil financial planning of Shyam, the dependent family members could not avail the financial freedom as those of Ram. They had to pay the instalment to money lender on regular basis. Due to heavy damage of the house, they had to take a rented portion immediately leaving the house as such. Thus, the family had to face the high financial burden owing to this sudden eventuality.
Conclusion:
From the analysis of the above two cases, we can understand that one should know and practice the financial planning in his/her life and avail the financial freedom such that even in his/her absence/death, his/her dependents should not suffer from the financial obligations.
Written by
Deshpande Abhishek, Assistant Manager, NCFE

Glossary of Abbreviations used in this Article

APY

Atal Pension Yojana

PMSBY

Pradhan Mantri Suraksha Bima Yojana

PMJJBY

Pradhan Mantri Jeevan Jyoti Bima Yojana

PPF

Public Provident Fund

NPS

National Pension Scheme

PMAY