What can Repiblic Day teach us about Financial Planning

POSTED BY Jagoinvestor ON January 26, 2009 COMMENTS (5)

India gained its Independence in 1947 . At that time India was free , and ready to grow on its own , with its own decisions . But it was not possible without a set of guidelines to guide the decision making process .

Success comes when you are disciplined and have a decision making process. On Jan 26 , 1950 our Constitution came into effect and now we had laws for different things .

Financial Planning

We knew exactly what we have to do when thing happens . We had a road map to follow. From there on we progressed and have came a long way . We can now say that we are much better than we were at that time and we continue to grow and make better decisions.

We need amendments from time to time and that helps us to change the bad laws and adapt to new situations.

How do we relate it to Investing?

We can learn from anything … really anything . Let us try to map each event discussed above and relate it to our Investing world .

1. Gaining Independence

When we get a job and start earning on our own, we are full of confidence. we are independent, We don’t need to ask for money from our parents. Rather we have to support them. We have responsibilities. There are many goals for us like buying house, car, saving for our retirement, Marriage etc etc.

2. Republic day

This is the day when we understand that we need to do our financial planning and have a set of guidelines to guide our decision making regarding our investments .When we know how exactly we are going to invest to achieve our goals, we have a clear road map and time duration .

We just need to follow it with discipline.

Example : If a young 25 yrs old want to retire at 55 with 2 crores at the end . He can take two approaches .

a) He can try to save money here and there, some month he can invest 10k, and some month he can skip it and down the line, he has a vague idea where is he going and how is he making progress. This kind of approach often leads to failure, because there is no road map and sometime will come when you will have no idea whats happening.

b) Second approach can be very easy . You have to make sure that you understand some thing very well and be clear about somethings. Those are

– Equity outperforms every other asset class in long term .
– Equity in long term has given 15%+ returns and its possible in future too .
– You should have understanding about the power of compound interest.

Now when you are clear crisp about this idea , then you can use a simple compound interest formula to see , how much you need to invest every month for rest 30 years (55 – 25) , which can generate 2 crores at 15% annual return .

The formula is

Final_amount = monthly_contribution * (1+rate) * ((1+rate)^months – 1)/rate

rate = monthly rate = 15% / 12 = .15/12 = .0125
months = total number of months you will invest = 30 * 12 = 360

Now you can calculate what monthly_contribution fits the values .

The amount comes to little below 3,000 per month .

Which means if you invest 3,000 per month for next 30 years , you can achieve your retirement target easily without fail. (Invest in Equity Diversified Mutual funds to target 15% returns for long tenure).

When you do this, you go with a plan (constitution) and dont have to doubt your self and you will not get lost. Just follow it with discipline without fail.

3. Amendments

Just like amendments are made in Law , because of change in environment and situations . You also may have to change you plans with market change and new products coming in (this happens rarely , because fundamental things remain same) .

Summary and Learning

What I want to point out here is that just earning money and being independent in not enough and cant make you successful with money , Discipline and proper understanding with good planning will help .

So if you are Independent but have not put your constitution in place , do it soon to really succeed . Make this day as your teacher and learn from it . Don’t be afraid of mistakes .

“Success is a ladder where every step is made up of Failure . If you cant fail !! , Winning will not be easy ” .

5 replies on this article “What can Repiblic Day teach us about Financial Planning”

  1. rajivahuja says:

    Thought provoking article.

  2. Manish Chauhan says:

    Hi Raj

    It depends on the policy you have , most of the policy allow surrender after 3 years only , but even in that case the surrender value is very less . I am not sure if you will get more than even 40% of what you have paid .

    Endowment / MoneyBack policies/ ULIPS are long term products and if exited in between causes losses almost in every case . If your maturity is near by within some years , Then it would be better to go with the policy now and not exit . But if its long way , then you may consider exiting .

    But before exiting make sure that you calculate the numbers . You must calculate weather you will benifit from exiting in terms of Rupees or not . See that if you discontinue the policy and then invest in any other thing , will the returns be able to cover your losses till now and potential future returns from your policy .

    The best risk management is taking good product in the start itself with proper planning , Now you are already in the middle of the mess i suppose . But still try to learn from it and take action .


  3. raj says:

    Hi Manish/Nitin,

    Can you kindly guide me as to how to make my LIC policies “paid up”? I have finished paying 3 yrs premium and want to know exact procedure to make this.

    Thanks to your and few other blogs, i have realized the problem and am trying to correct my plans.

    good articles and keep them coming…


  4. Manish Chauhan says:

    Thanks Nitin

    Happy new year to you too 🙂

    Great that you are now taking informed decisions and understand the same .

    – manish

  5. Anonymous says:

    Hi Manish,

    How are you? First let me wish you Happy New Year 2009 and Happy Republic Day. This is a real good article. I was on vacation to India so was not active with your blog. Real good articles on Jeevan Astha. BTW as discussed in our previous mails, I stopped all my endowment LIC policies. Had to do a lot of convincing for my parents to make them understand why I am doing it. My agent didn’t argue much as he knew it would be in vain, but he did try to lure me with Jeevan Astha but I knew in the first instance that it would be just another gimmick from LIC. But after reading your blogs now I was happy that I have enlightened a bit.


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