Diwali Special: Steps Towards Creating And Preserving Wealth

Umesh Rathi, Certified Financial Planner^cm at Arihant Capital Markets, shares simple and easy tips you need to follow for wealth creation, wealth preservation and wealth transfer.

Diwali is the biggest and most celebrated festival in India. The festival spiritually signifies the victory of light over darkness, knowledge over ignorance, good over evil, hope over despair. On the day of Diwali, it is customary to worship Goddess Lakshmi, Goddess Saraswati and Lord Ganesha together. It is well-known that Goddess Lakshmi is the Goddess of wealth and prosperity, Goddess Saraswati is the Goddess of knowledge and wisdom while Lord Ganesha is considered the God of intelligence. Gaining wealth without knowledge and intellect will only result in misusing the wealth. So, this Diwali we must all make an effort to first acquire the knowledge and intelligence to manage and spend the wealth for prosperity to last and flourish. That’s precisely the reason why people worship these three deities together to welcome wealth along with knowledge, wisdom and intelligence as they go together.

It is so unfortunate that though we spend half of our lives working long hours to make our ends meet, yet we are barely able to take out time to manage our personal finances. The need of the hour is to not only earn, but also allocate our time in managing our money and creating a sweeping change in our mindset. To make this simpler for you here are very simple and easy steps for wealth creation, preservation and smooth transfer of the same to next generations. Thank us later!

Wealth Creation

1. Improve your financial knowledge:  Today most of us suffer from financial diseases like low returns, debt trap, under-insurance, insufficient retirement funds and improper asset allocation. The major cause of these problems is that though we had studied various subjects like mathematics and science at school, but we were never taught about personal finance. Having the right knowledge of PERSONAL FINANCE is imperative and is the first step towards your financial well- being. If you don’t get the importance of personal finance from early on this can seriously delay or prevent you from building wealth.
2. Have a saving plan for each goal: Planning is important at every stage of life, and is absolutely essential when it comes to matters of money. You must set your financial goals for every stage of life and plan their achievement levels. Financial goals can be of three types: short, medium and long-term. A short-term goal could be anything like say purchasing a car, a medium – term goal may include planning your child’s education and a long-term goal could be your retirement planning. Whatever be the financial requirement, it can be fulfilled by determining its urgency and thereby making a saving plan for each goal.
3. Budgeting: To gain control over your finances, you need to know how much you are earning and where you are spending. Budgeting will help you to identify high expense area and help you evaluate how you can curtail unnecessary expenses. This knowledge can be very helpful in saving money and building wealth in the long run.
4. Reduce your loan burden: We should review our existing loans and ensure that we only have the good debt aka loans that will help us in increasing our net worth in the long run like education loan. In case we have the bad debt we should plan for repaying the same immediately. A proper debt evaluation will also help us find out ways to reduce our interest burdens.
5. Invest as per your risk appetite: We should understand that risk and return are the two sides of the same coin and an investment with a higher return indeed bears a higher risk. Therefore, we should plan our investments as per our risk appetites and investment horizon. We should also ensure that the post tax returns on our investments are able to beat inflation and additionally, offer sufficient liquidity.
6. Tax planning in conjunction with Financial Planning:  For most of us, tax planning is an end-of-the year, last minute exercise. Tax planning should actually be done keeping in mind our needs, life goals and risk appetite in conjunction with the overall financial planning. You should take help of an expert who can help you plan your taxes in a way that you shell out the minim to the government and save in maximum for your financial goals.
7. Take advice from the right experts: While we often seek expert professional advice in every field, such as consulting a doctor for our health, an architect for constructing our home, a CA for managing our taxes, or a lawyer for handling our legal matters, sadly when it comes to taking advice on one of the most important matters of life ‘finance’, we listen to anyone and everyone. Our beloved uncle who is also an insurance agent becomes our insurance advisor, our Chartered Accountant becomes our wealth manager, our friends who just made money from a ‘hot stock tip’ become our share market advisor. And we absolutely forget that actually the need for the most important and relevant of all – a Certified Financial Planner^cm for our Financial Planning.Unfortunately in India, the financial service providers often focus on providing commission based recommendations. They are not bothered about providing knowledge to their customers to help them manage their money for financial well being. Hence, we need financial experts who can give solutions considering one’s over all needs, attitude, life style, risk tolerance and financial situation. Transparency and honesty are the main aspects you must consider while selecting a financial planner for yourself.

Wealth Preservation

1. Take adequate insurance cover: Insurance is probably the most critical, and yet the least seriously dealt with aspect of financial planning. Though most of us take life insurance or health insurance covers, but the amount of cover is usually not adequate. While buying life insurance, you need to consider the immediate, future and living expenses that your family might have to incur in case a tragedy strikes you. You should not mix insurance and investment. Hence, the right strategy is to buy pure term insurance with adequate cover. Looking at the increasing medical costs, one should also plan to take health insurance for each member of the family. Critical illness insurance, personal accidental insurance and property insurance should also be a part of every individual’s insurance portfolio.
2. Create an emergency fund: Life is full of uncertainties and it is often difficult to incorporate such uncertainties in our financial plan. Emergency fund not only helps in fulfilling the financial needs during uncertainties but also secures us from mental disturbances which may arise due to financial crisis. Our emergency fund should be equal to an amount of our monthly expenses plus our loan EMI of 4-6 months and yearly insurance premium.

Wealth Transfer

1. Share your financial affairs with at least one trusted person: We often read in newspapers about billions of unclaimed money being stashed in bank accounts.  The underlying cause for this is that no other member in the family of the deceased person is aware about the finances left behind, and hence the money cannot be used by the surviving family members.  As Benjamin Franklin so accurately noted, “In this world nothing can be said to be certain, except death and taxes.” We never know when the death will strike us, therefore, it is imperative that you share all your financial details with at least one trusted person who can ensure the last thing your family have to worry after you is money.
2. Record Nomination: You must make sure you update the nominee / beneficiaries in all your financial accounts and that the details are correct. Many-a-times people forget who they put for nomination, especially if an account is old or created before your marriage. You don’t want your money to go to the wrong person. Besides, any lapse on your part will result in hardship to next kith and kin that are required to obtain Succession Certificate or to get the Probate from the Court. This process takes long time, up to 12 months, and involves additional expenses of court fee to the extent of 8 to 10% of the asset value. If the nomination details are updated, the nominee can acquire the movable assets of the deceased without any extra expenses and hardship.
3.  Write your WILL: If you don’t already have a will, now is the time to create one. Contrary to the popular belief a ‘will’ is not something that one should leave for their old age. We all believe we will live forever and procrastinate this task, but the harsh truth is most people die without writing their WILL, which results in family feuds and complications. Most of the individuals do not opt for making the Will just because they either think they do not possess enough assets to undergo the task of creating a Will or think that since they have made the nomination there’s no further need for a Will.  Undoubtedly nomination is a great help to successors but the nominee can hold the assets only in the capacity of a trustee and has to pass the assets to its successors. So it is important that you prepare your Will in addition to nomination. Therefore every person above 18 years, having sound mind and assets/life insurance policy should write WILL.Be sure to review your Will yearly and make changes as needed.

Following these strategies will help you in creating and preserving wealth through generations. Taking help of a good financial advisor will make things easier and smooth for you.

Wish You A Happy and Prosperous Diwali that will last a lifetime with these wealth management tips!

(This article was originally written for Moneycontrol)