Health Care Inflation: Are Your Prepared for this Future Horror?

Rising cost of healthcare is not a new thing. But since most people in present generation are young, they don’t discuss it often. But still, the idea of health care inflation cannot be ignored now.

 
Health Care Inflaton India
 
Lets see why?
Suppose you have a health insurance cover of Rs 5 lac today.
But after 5 years, if you still have the same policy, i.e. with coverage of Rs 5 lac, then does it make any sense?
If you can answer this question, then it means you know what are the risks here.
But if you can’t answer, then have a look at the example below:
A small surgery costs about Rs 4 lac today. Now considering a very conservative medical inflation of 15% (yes, its conservative), the same surgery will cost more than Rs 8 lacs after 5 years.
So the difference between the cost of surgery in future (Rs 8 lacs) and your insurance cover (Rs 5 lacs), i.e. Rs 3 lacs will have to be paid out of your pocket. And that is assuming that your health insurance provider pays 100% of the sum assured amount.
A Rs 4 lac surgery can be covered easily with Rs 5 lac cover today. But like everything else, price of healthcare is also rising with time (due to inflation). So cost of this surgery will also rise in future.
health care inflation india chart
This sample health care inflation chart clearly shows that given a health insurance policy with fixed sum assured, chances are high that your health cover might not remain adequate with time. And this is a very important point that most people forget.
Not buying a health insurance is not an option for most of us. Ignoring health insurance can easily set you back by a few lacs!
And even if you can afford to pay the medical bills, why do you want to spend several years’ saving on it? Why do you want to dip into your savings and disturb the process of compounding?
Health insurance allows you to transfer the risk of paying large future medical bills from yourself, to the insurance company – that too for a very small price (premium). It makes perfect sense. Do read why Health Insurance is your Wealth Insurance if you still have doubts.
Lets come back to the discussion of health insurance inflation.
A policy bought today might not be sufficient tomorrow.
Another unfortunate truth is that medical inflation in India is much greater than regular inflation. Some estimates put it at 15%.
But health care inflation definition (%) can differ as treatment costs of different medical ailments increase at different rates – depending on individual ailment-specific medical advancements and various other factors. It can be 30% in some cases and maybe 10% in others.
But in general, the cost of medical treatments is going up. I couldn’t find but there are bound to be some healthcare or medical cost indices, which track the rise of healthcare costs in India. My guess is that these index would be based on parameters like Hospital charges (which includes room rent, other expenses), doctors and  technicians fees, drugs, equipments, nursing, etc. Do let me know if you find one.
Another point to note is that government hospitals (which have the potential to offer cheap healthcare services) are in pretty bad shape. So most people (in middle class) prefer going to private hospitals, which in turn increases the cost of treatment for obvious reasons.
It is for these reasons that one must prepare to deal with rise in healthcare costs.
What To Do Then?
So what should you do if you now understand that your current health insurance cover might not be as helpful to you in future, as it is today?
Lets see…
I think building multiple levels of protections is the key here. It might sound strange but hear me out:
Step 1
Ensure that you have a Health Insurance plan, which preferably covers you for lifetime. If you do not have a policy till now and are solely depending on the medical insurance cover provided by your employer, then you are making a big mistake.
Don’t do it. Don’t take chances.
Go and buy a policy for yourself (and your family) immediately. And don’t worry about finding the perfect policy. There are many health insurance plans in India and you will easily find a good enough policy for yourself and family.
Step 2
Next is to ensure that your cover rises roughly inline with rise in medical costs (inflation). Some policies allow increase of coverage for every claim-free year. This can work to an extent. Better would be to go in for top-up or super top-up policies. They are cheaper and financially efficient.
Step 3
Purchase some critical Illness cover too. Such covers payout lumpsum amount in case of critical ailments like cancer, heart diseases, etc. This can be of great help and offset the loss in income, in case the insured person is unable to remain employed in future. You should also consider buying accident (partial/complete disability) covers.
Step 4
Once you are through with above steps, think seriously about building a medical emergency fund. Yes. This is not the same as your regular emergency fund.
Its more about creating a backup to deal with unexpected medical expenses in future, which might not be covered under plans bought in steps 1 to 3.
Health Insurance Portfolio
Where to put this fund is the question now. If you think that current plans will keep you adequately covered for next few years (ideally more than 5 year), then you can consider investing small amount every month in some well-diversified large cap or index mutual funds.
This will act as a health corpus, which if not disturbed in near future, can help you save up a big amount for your health-care needs in post-retirement years. Now this might not fully cover all your medical costs in future. But it will help you cover some of the costs anyway. This effectively means that you are indirectly reducing your dependence on your health insurance policy, which is a good thing.
Note – You might want to use your regular emergency fund in case of requirement. Though you can do it, I suggest you don’t – unless it really is an emergency. If you can manage without dipping into this emergency fund, then its great. And if you plan well and in line with steps 1-4, then you can actually do it.
That’s it about how to layer your medical costs contingency plan.
You should also make sure to check actual costs of various surgeries and medical procedure in your city/locality to get an idea about the adequateness of your current coverage.
And please don’t think that since you are healthy today, you don’t need a health insurance. There is absolutely no guarantee that you will remain healthy in future. Though I pray that you and me do. 🙂
This brings me to another suggestion, which is ofcourse a no-brainer.
Stay healthy. More importantly, understand the importance of being healthy. That way, you can enjoy the life as it is meant to be enjoyed and ofcourse, it won’t hurt you financially too. 🙂
So take some time off and call up your doctor friends / clinics / hospitals. Get an idea about current medical costs. You will immediately know whether you are on the right track or not.
Medical inflation is a reality that cannot be ignored now. And we are not in a country where healthcare is free. Isn’t it?
So every man for himself and God for us all.
Go and do what is necessary.
 

How much Life Insurance to Buy & How To Calculate the Right Amount?

How Much Insurance To Buy

A reader had a very specific question in Personal Financial Concerns Survey 1.0. It was about calculations related to life insurance amounts.

This is what he had to say:

In past, I have bought insurance policies for saving taxes and investments. But now I understand that these should not be the main reasons for buying insurance. Hence, I want to buy the right insurance cover to secure my family. How much cover is enough for me? People say buying Rs 50 lacs or Rs 1 Crore coverage works. Is it correct?

Now that’s a question that many people have.

I have seen people earning in 7-figures and having insurance cover of 6-figures! 🙂 They believe that a 6-figure amount will be sufficient to take care of their family in case of their death. And these people don’t even have a lot of money saved up.

Tells of risks that people take with their family’s future.

Insurance is bought simply to ensure that insured person’s family does not have to make sacrifices with their standard of living, are able to achieve their future financial goals and close all outstanding loans. That’s it. Nothing more. Nothing less.

But I am not writing this post just to prove that buying life insurance is a must. I am rather concerned about addressing the reader query, which is:

How much Life Insurance to Buy?

It is not that difficult to calculate.

You life cover should be sufficient enough to take care of the following 3 parts:

  • Provide enough money to foreclose all outstanding loans
  • Provide enough money to help meet regular day-to-day expenses of your family for years to come.
  • Provide enough money for your children’s education and marriage.

Lets take them up, one by one…

Part 1: Provide enough money to foreclose all outstanding loans.

This is pretty simple to understand. Just make sure to add any foreclosure charges that have to be paid in case of loan closure.

Lets call this as Amount-Loan-Closures.

Part 2: Provide enough money to help meet regular day-to-day expenses of your family for XX number of years to come.

(Caution – You need to be really sure about what XX is here – as it is the number of years, you think your family needs to be financially supported).

If you think your working spouse will take care of this part on her own, then that’s debatable. Just remember, that in a dual-income family, life style costs and regular expenses generally increase to use a larger part of the combined incomes.

So if suddenly one income stops, it can become a big problem to maintain the existing lifestyle.

Hence, it’s better and safer to make a provision for this as well.

Now how to calculate this amount?

Step 1: Estimate regular annual family expenses (exclude your individual expenses).

Step 2: Subtract the amount you think your spouse can manage on their own (better keep this as minimum)

Step 3: Understand that multiplying the above amount with the number of years (XX above) you wish to support your family won’t work. Why? Inflation. Inflation will increase these expenses every year. So take a safe inflation assumption (say around 8%).

Step 4: Understand that the amount your family gets from insurance company, will be invested and used to generate income. Don’t expect very high rates of returns from the investment. Lower your expectation are, better it is.

Step 5: Use this information to calculate the required insurance amount. This amount will provide enough money for your family to meet regular day-to-day expenses for the XX number of years.

Lets call this as Amount-Family-Expenses.

Part 3: Provide enough money for your children’s education and marriage.

Now it’s a personal choice here – Do you want to provide for your children’s education or marriage needs or not?

Assuming you want to, lets see how to arrive at this figure.

Step 1: Estimate the amount required for your children’s education and marriage, if it were to happen today.

Step 2: Since you children need funds in future, understand that inflation will increase the amount required. So if a MBA from good college costs Rs 15 lacs today, it might cost Rs 35-40 lacs after say 10-12 years. Calculate the amount in future using inflation numbers.

Step 3: You might have already saved some money for these goals. Calculate the future value of these savings and subtract the figure from amount calculated in above step.

Lets call this as Amount-Child-Goals.

 

Now we have calculated 3 figures for each part.

Add these three figures:

= Amount-Loan-Closures + Amount-Family-Expenses + Amount-Child-Goals

This is you current insurance requirement.

But you don’t stop here.

I am sure that you have been careful in your calculations.

But you see, in all calculations above, we had to make certain assumptions. Assumptions that require us to make predictions regarding rate of inflation, rate of return, etc. Now you know that even experts have trouble predicting the future. So at best, our predictions are mere educated guesses and not future realities.

We can always be wrong in our assumptions.

So in order to provide a buffer for mistakes in our assumptions, increase the amount you calculated above by atleast 10%.

Higher you bump it up, better it is.

I personally take it at 25%. (Even if it means that you family ends up with more money than they actually require, it is a good problem to be in. Isn’t it?)

This is the Gross Insurance Requirement for you.

Once you have calculated the figure, you need to subtract a few things from it. You might already have some other insurance policies,  employer-provided insurance covers, existing savings and investments earmarked for some of these child_goals . Subtract these amounts from above figure.

This will give you the additional insurance cover you need to purchase.

You can use the following grid as a guide:

Life Insurance Calculations

I am sure that once you are done with your calculations, a huge amount will be staring at you from your calculation sheet. Many of you who have endowment plans, moneyback plans, etc. as insurance covers, will even fear asking about the premiums for such large covers.

But don’t worry. Solution is there. And it is to buy plain term insurance cover. Its cheap and can provide coverage of almost Rs 1 crore for around Rs 10,000 – Rs 12,000. But remember one thing – term insurance has no survival benefits. You won’t get any money in case you don’t die within the insured period.

 

Important points:

  • Buying a term insurance does not mean that you don’t need to save for your future goals(retirement, kids education). It is only a backup plan in case you don’t survive that long. Insurance is not investment.
  • You are smart enough to purchase the right insurance cover for your family. But are your family members smart enough to deploy the huge insurance amount correctly (which they get when you die)? Don’t bet on it. Make sure that you sit with them and educate them what insurance is. And more importantly, what to do when they get the big amount. Tell them where to put the money and when to withdraw it. One wrong decision on their part and they will lose the money (a part or whole, who knows). And worst is that this is inspite of you having taken care of everything. So make sure you educate them.

There is a way to reduce your insurance requirements. Suppose you want to provide for your family’s expenses for 25 years (Part 2 of the above discussion). But your child’s education goal is just 10 years away (Part 3). So if you follow the approach discussed in article above, it will mean that you are paying for providing risk cover for the child’s education goal, even after its completion (i.e. 25 – 10 years = 15 years).

Effectively, you might find yourself paying a premium for sum assured that is higher than what is actually required. But that is not completely wrong. As I said, being over-insured is any day better than being under-insured. In any case, your insurance requirements keep changing every year.

The problem (though wrong to call it that), is solvable through an approach known as laddering of insurances. Its an approach where one buys term insurance plans of different durations that correspond to major goals like kids education, marriage, etc. Once the period of shorter-term plan is over, it frees up cash that can be invested elsewhere. Its an interesting topic – Laddering. I will write about it in another post soon.

17 Disturbing Personal Finance Questions to Ask Yourself

Disturbing Personal Finance Questions
  1. If I die today, how much money will my family be left with?
  2. How much of this money will come from my savings/investments and how much from the insurance?
  3. Will the money be sufficient for my family to take care off their day-to-day expenses, future goals, pay-off all loans and help maintain their life style?
  4. What would happen to me if my spouse passed away suddenly or lost his/her job? Will lose of second income throw my life out of balance?
  5. Do I know all the financial goals that I need to be saving for?
  6. If answer to the above question is yes, then do I know which are the more important ones and have I prioritized them?
  7. Do I know how much I should invest every month for each goal?
  8. Do I know how much can I actually invest for each of these goals?
  9. Do I have a plan to tackle the shortfall in the investment amount – if not today, then after some years?
  10. Is the health of my family and myself insured? Is the insurance sufficient?
  11. Do I really know the answer to the above question of it being ‘sufficient’? If not, do I understand the price I will pay in case of any unfortunate event? Doesn’t that scare me?
  12. If I lose my job tomorrow, how many months can I manage my household expenses (including EMIs), without breaking into my long-term savings (like retirement corpus)?
  13. Since we are talking about emergency funds above, if answer to previous question is less than 6 months, then should I not be worried about this grave mistake I am committing?
  14. If I am targeting early retirement, am I saving more than what normal ready-to-retire-at-60 people do? If not, how do I plan to retire earlier than others?
  15. Are there any big expenses (like property downpayment) coming in the next few years (< 5 years). If yes, am I saving money for that or I am betting on withdrawing money from some other sources (retirement savings, savings for kids’ education, etc.)? Do I understand the impact of doing that (withdrawing money from retirement savings)?
  16. Sum up the total annual incomes that you have earned during your working life. Now compare this with your current networth? If the networth is not big enough to be compared with total-life-earnings, then do you have a rational justification for being in this state? Where has all the money gone?
  17. If you die suddenly, will your dependents know what to do with the money they will get (savings/insurance)? If no, then do you think they will be able to live their life in financial peace in years to come? What are you doing to help them understand how to manage money?

If answer to most of the above questions has you worried, then it serves my purpose.

But honestly, I did not want to write such a pessimistic post.

But then I thought that it was necessary. The sooner people start asking some tough questions from themselves, better it will be for their own good.

Now ofcourse this is not a comprehensive list. But it will help you think on the intended line. When it comes to money, most people are worried about earning more, saving taxes, getting rich overnight. But what people fail to do is to ask some fundamental questions like these.

Your relationship with money depends a lot on your regular self-evaluation. If you want to succeed at money, you need to constantly evaluate and re-evaluate your own life, financial goals and money choices. Every single Rupee that you spend, should pass through the filters of above questions.

Most people have the common sense to answer these questions. This also means that they know what they should be doing with their money.

But still, they don’t do it and postpone taking the correct action. Isn’t it (unfortunate) justice that they don’t get to live a financially happy life?

Sorry for sounding so brutal. But as I said in my previous post too, ask yourself some tough questions.

Getting Your Personal Finances in Order

Getting Your Personal Finances in Order

There are people who struggle through their entire lives – just paying bills, loan EMIs and continuously doing things (or job) they don’t like. Lets aim not to be like those people.
There are people who have no idea how they manage to live paycheck to paycheck. Somehow, they are still able to save some money here and there. But that’s mostly because of luck and not their skills. Lets aim not to allow luck to play such a big role in our lives.
Then there are people who live under this constant fear of not having enough money for their short- and long-term goals. This is inspite having decently stable and regular incomes. Obviously, these people are doing something wrong. Lets aim not to be in the same category as these people.
Lets rather aim to become a person – who broadly knows how money works and he uses that knowledge to make it work for himself. This will make him prepared, confident and happy with his financial situation.
But the journey to become such a person will not be easy.
It will be tough at first.
Tiring in the middle.
But eventually, it will be worth the effort.
Now its my personal feeling that aperson who doesn’t appreciate the importance of personal finance, is unlikely to save or invest a lot of money. He will instead end up spending whatever he can. This might seem like the right thing to do now. But remember, that as you edge towards retirement and your regular income is about to be extinguished, you will have nothing left. Your kids might not be of much help too.
On the opposite end can be a person, who is quite frugal (doesn’t spend a lot) – but still does not understand the real meaning of personal finance. While he might have money stashed up in bank, his money might not be getting utilized to its fullest extent.
So understanding personal finance is absolutely necessary. And luckily for us, its not rocket science. But most people still get it wrong.
Get your + family’s life and health insured, save some money for emergencies, invest for long-term goals, spend wisely and more importantly, less than what you earn.
Its pretty simple.
As far as my own personal finances are concerned, I have a system that works for me. Its not perfect. But given my current circumstances and priorities, it works for me.
But the same system might not work for others.
This is the key point to understand here.
Here, there is no one size fits all.
You need to think for your own self.
Don’t worry if your financial life is still not where you wanted it to be.
But also, don’t keep waiting for the perfect personal financial strategy to find you. It really takes time to see what works and what doesn’t with money. Empower yourself with knowledge – read books, Stable Investor ;-), reliable online resources and take action.
Don’t just copy others or keep waiting as both can be financially harmful.
And be ready to ask yourself some tough questions…
If your aim is early retirement, then ask yourself – Am I doing something to retire early? 

Am I saving (or investing) more than regular people (who are scheduled to retire at 60)?
If you want to save money for travelling around the world, are you actually doing something for that? Remember, that just waiting (and ofcourse saving money) to travel when you grow old, doesn’t work. You travel a lot betterwhen you are young to middle-aged. Old age makes travel a not-such-an-exciting option for most people.
I specifically took up the points of early retirement and travelling because these are close to my heart. 🙂 Now talking of things close to my heart, let me confess something:

I don’t save and invest as much as I possibly can.
Yes. You read it right.
Why?
Because, I don’t want to keep saving without spending.
Sounds odd?
Read further…
I spend a lot of money on travelling. Continuously earning, hoarding and not spending is something that I don’t aim to achieve in life. Ofcourse, getting rich is fine with me. But being the richest man in graveyard is not my thing.

Richest Person Graveyard
Don’t get me wrong here.
I am not saying that I don’t save or invest.
I am also not saying that spend everything you earn.
All I am saying is that there should be a balance between the two.
You shouldn’t compromise the present by not spending at all. But you also shouldn’t compromise the future by not saving at all.
Warren Buffett once said:
Who is to say whether it is better to defer a dollar of expenditure on your family – on a trip to Disneyland or something that they’ll get enormous enjoyment out of – so that when you are 75, you can have a 30-feet boat instead of a 20-feet boat. There are advantages to spending money on your family when it is young – giving them various forms of enjoyment, education, or whatever it may be. But it’s crazy to be spending 105% of your income.
That’s so damn right! Isn’t it?
So unless you worship the act of hoarding money, having a balance between saving and spending is the key. I remember reading the below words somewhere:
Save enough money so that you’ll have enough for the future and for emergencies. But spend enough now to avoid looking back with regret.
A new financial year has started. And I think that it’s the right time for you to think about your personal finances.
Your personal finances might be in a mess. Accept the hard truth. And make a conscious decision to do something about it.
Its also possible that you might already be doing great. But there are always things you could have done better.
So take out some time to assess your networth, goal readiness, risk coverage, investment plans, etc. If someone is trying to stop you from doing it, do this to them. 😉
Strive to make your money decisions smarter, wiser and more efficient. Becoming wise is a slow game. But it is necessary if you have a long way to go. And I am sure you have.

Have a very happy financial year!! 🙂

Not Planning for your Children-Specific Financial Goals? You will screw up your other Goals.

Children Goal Based Investing

Retirement, Children’s Education, their Marriages and House. For most people, these are the biggest financial goals of their lives.

Now at the face of it, these goals seem unrelated to each other. But if you think about it, you will realize that not planning well for even one of these goals, has the potential to screw up your plans to achieve other ones.

To understand this, lets suppose that at the age of 50, you have Rs 50 lacs in your retirement corpus. Lets also suppose that you have not saved enough for your children’s education.

Now the day comes when your child needs to pay Rs 10 lac every year for his 2-year post-graduate course. You can very well take an education loan for that.

But it’s possible that you might consider dipping into your retirement corpus to help your child pay his fees. It’s possible that your spouse might push you not to go for such a big loan. Even you might think that since your retirement is almost a decade away, taking out Rs 10 lac from Rs 50 lac might not be a big thing. Since your income will only increase going forward, you can compensate for this withdrawal by saving more in remaining 10 years (to your retirement).

But unfortunately, it is a big thing. Dipping into your retirement corpus means that you will break the process of compounding.

To put it more simply, it means that you will not have as huge a retirement corpus as you might have, had you not taken money out from the corpus.

That is not all. Once you do it. You might consider doing it again when you need to pay for your child’s marriage. Isn’t it? It’s a possibility, which you cannot rule out. Marriage expenditures can go out of hand very quickly.

So unless, you make separate arrangements for each of your major financial goals, chances are high that it will have a negative impact on those for which you have made arrangements.

I once wrote that you can get loan for your child’s education and marriage, but not for your retirement and that you should never treat your children as your Retirement Fund. At the cost of sounding funny, the previous statement does send out an important message.

For most parents, child’s education is something that they will never compromise on. But despite recognizing the need to save for their children’s aspirations and education, most people do not take timely action towards it.

To an extent, same goes for children’s marriage.

Result is that these people either end up taking loans, sell land or worst, take money out of their retirement corpus.

Ideally, you should start investing for your children’s education and marriage (assuming you do want to contribute to both) as early as possible.

The more years you have before you need the money, the less you need to save/invest every month.

So lets say that if you have less than 10 years before you need the money, then you might have to save/invest Rs X.

But if you have more than 15-20 years before you need the money, you might have to just save 1/3rdor even 1/4th of Rs X.

It is simple maths and as you will realize, because your investments have more years to compound.

How to Plan for Child’s Future?

Step 0:

Once you do realize that you need to start making arrangements for all your financial goals simultaneously, it is equivalent of winning one-fourth the battle.

It is like you have realized that just like your kids, even you need to do your homework. 🙂 And that too, start as early as possible. Now to be honest, one cannot guarantee that the amount saved by parents will be sufficient to fund their children’s education and marriage.

Children might pick a career path, which requires multi-year high-cost education. But being prepared financially, to the maximum possible extent is what parents should target. It is better than not being prepared at all. So if you end up saving Rs 25 lacs for your child’s education, when the course costs say Rs 30-35 lacs, then you are still better than someone who has saved nothing for child’s education. Isn’t it?

Step 1:

Next you need to ascertain how much money you need for your children’s education and marriage. For that, you need to do some simple maths and take into account current cost of education and how much you would want to spend on their marriages.

Please don’t forget to take inflation into account.

So a course that costs Rs 15 lacs today (when say your kid is 5 years old) might cost Rs 50 lacs after 18 years (when kid becomes an adult of 23). This is assuming an inflation of 7%.

Now I can share from my personal experience that as far as education is concerned, college fees generally don’t increase every year. But every few years, the fee increases without warning. It might even double! So its better to use a higher inflation figure while doing the calculations. Atleast keep it more than 7% that I used in example above.

Step 2:

Once you know how much you need for education and marriage after many years, you need to calculate how much you need to invest every month to reach the target.

Keep in mind that money being saved for education will not be used in one shot. Fee is paid semester/year wise and might be required over a period of few years. As for the marriage, money required is generally used up within a year.

While calculating the amount to be invested each month, you need to make an assumption about the expected returns your investments will generate. If you are starting early, you don’t need to take a lot of risk and can consider investing a small part in debt options like PPF (assuming goal is atleast 15 years away).

But if goal is not that far off in future, then PPF might not serve the purpose. But you can still consider keeping a part in debt funds and if the goal is atleast 5-7 years away, then make sure that most of your investments find way into well-diversified equity mutual funds.

A reader once mailed his query where he clearly mentioned that though he did plan to save for his child’s education, he did not want to save for child’s marriage. Now every individual needs to take his own call on whether to support their child education, marriage, both or none. But idea of this discussion here is to highlight that it is wrong to dip into the funds saved for your Retirement, just because you were lazy to not save enough for other children-specific goals.

This brings me to the last point.

Step 3:

Lets assume you are a great parent saving for your child’s education and marriage. You have been honest about it and have never missed a monthly investment towards these two goals. This is in addition to your contributions towards other strategically (systematically) important goals like retirement.

Suddenly and unfortunately, you die.

Then what?

You fail to take care of your family’s financial needs inspite of working and saving hard when you were alive.

This risk needs to be covered too…

So make sure that you buy adequate insurance to cover planned expenses of your children (like education and marriage). Ofcourse this is in addition to coverage you need to have to cover for everyday expenditures of your family and to replace your income.

I know, all this sounds overwhelming if you are parent of young kid(s). It’s hard to understand the urgency of all this now, considering that your child’s major fund requirements are decades away. However, the sooner you begin, better off you will be when money is actually required. And just think of the respect your child will have for you when you tell him that you have made taken care of fund requirements for his higher studies. He will be proud of you and your foresight. That will be a pleasant scene to be a part off as a parent. Isn’t it? 🙂

If you are still not convinced, try talking to those whose kids are about to start college or about to get married in next 1-2 years. They will tell you how important it is to start saving early for all these goals.

How to convince your Spouse to start investing in Mutual Funds and Stocks?

 
Spouse Money Investing

In the First Personal Financial Concerns Survey, many questions were asked about how to convince one’s spouse to reduce expenses and increase/start investing.

Now the first part: about reducing expenses, is tough.

And frankly speaking, it’s much tougher than most staunch advocates of frugal living might make it sound. Infact, expenses have this bad habit of beating income increases every year. 🙂

But jokes apart, the survey did point towards one clear problem:

Not every couple thinks on same lines when it comes to money. At times, husbands have no clue whatsoever about the benefits of investing and at times, wives cannot stop themselves from spending.

So what I will do in this post is to share my views on the second part, i.e. start investing. Deliberately, I will leave out the first part (about reducing expenses) and play safe with female readers. 🙂

Let me first share few extracts from survey responses:

Respondent 1:

“My wife wants safety in all investments. She is against investing in any mutual funds (especially equity) because of the NAV fluctuations. I know that daily fluctuations are a common phenomenon and there is no need to worry about it. But even then, I am being forced to invest more in FDs, which I don’t like personally….My goal is to invest for my retirement…”

Respondent 2:

“Currently my spouse is working but may leave her job after few years. Though she does not want me to spend her money, she herself is of the free-spending kinds. Tell me something which will nudge her to reduce expenses and start saving for our single-income days in future…”

Respondent 3:

“…I regularly send personal finance articles to my wife to help her understand the concepts of spending less and investing more. But she never reads them. How to convince her about the benefits of investing?”

I am sure these extracts would sound familiar to many of you. 🙂

So…

How can You convince your Spouse to get serious about investing?

But before I try answering that question, I think I should share about my own personal experience here too…

I would say that I am lucky. My wife is an investor in her own right. We both spend… a lot at times 🙂 But spendings are more about buying experiences and less about buying gadgets and other stuff. It might sound boring, but that is how both of us operate. We generally don’t buy things that we won’t value after a few months. We also don’t want to save everything and wait till we are old. It just doesn’t make sense to us. To sum it up, we try to balance our expenditures and investments, to get the best of both the worlds. So spending a lot is not much of a problem for us.

That is about my wife and me.

I am sure many people would be having a tough time explaining the benefits of investing to their spouse.

The following image clearly shows what I am trying to say:

convince spouse investing

Now I am assuming that YOU are fully convinced that for most people, investing (in good mutual funds) is the best option. This is assuming that you understand the risks and have the appetite to digest temporary fluctuations.

But what about your spouse?

The first thing for you to accept is that your spouse might be operating from a very different set of money beliefs than you. So even though you cannot force your beliefs on your spouse, what you can do is try convincing him/her to understand the benefits of your belief.

But before you do so, you need to be sure. Sure that you are right and your spouse is not. Because in reality, it can be the other way around, without you realizing it. 😉

My personal belief is that for common people, the most important thing to understand is the impact of inflation and how it erodes their future purchasing power, despite regular increases in income. Other important concepts like time value of money, compounding, etc. can only be realistically demonstrated when one clearly understands how his or her purchasing power is affected and what one can do to protect it.

So the next important thing, which needs convincing about is the impact of inflation. You need to convince that Rs 100 today is only worth say Rs 95 after a year – because of inflation.

How do you do it?

Its tough but you can choose examples of items, which are of everyday-use for your spouse. So if something that he/she uses daily, cost Rs 50 in 2011 and now costs Rs 80, then that is real-world inflation for them.

You can repeat this exercise with other costlier items too. If your spouse loves travelling, then you can use that as an example.

Now comes the tricky part.

Ask your spouse to imagine a scenario where both of you are not earning, living off a small corpus that you have saved over the years and more importantly, when the costs of all necessary items have risen way beyond your expectations. As for your dream vacations etc., those are beyond your financial capabilities’ then.

And if possible, be a little dramatic about it. 🙂

It helps, I swear.

Now tell them that if they don’t start thinking about investing soon, then you both’s retirement might look similar.

The idea is to push the discussion from a general one to one that touches the borders of fear. It can help reinforce the concept of the need for investing.

Once the realization occurs, it will become clear that keeping money in safe options like FD won’t be of much help (but you need to show that FD paying 5% after tax, cannot negate the effects of a 7% inflation). Your spouse will also understand that prices going up over time, putting money only in safe products or may not cover the same expenses in future.

The whole idea of having such a discussion is to prove that to have enough money for preserving the desired future lifestyle, investing (in better return-giving products), is the only option. Infact, putting money in FDs is akin to being ‘Guaranteed Losers’. Though it is still better than not saving anything at all.

You can also take help of the older generation – maybe your parents or your spouse’s parents.

Elders are real treasures of experience and they can help you convince your spouse about the importance of understanding inflation, saving and investing.

Here is a tip… ask them about price rise in the cost of medicines and healthcare. And make sure your spouse is there to listen to their experiences. I am telling you that not just your spouse, but you yourself will be shocked to hear what they tell.

It is also possible that your spouse might not be interested in touching the so-called risky products like equity mutual funds. This fear may be borne from past experience of him/her or family members losing money by investing in stocks. It is your responsibility then to explain the difference between speculating with shares of a single company as opposed to investing in a diversified group of hundreds of companies (i.e. mutual funds).

Now a very important thing to understand here is that whenever you have this discussion, never speak as an authority on investing or money. The discussion should be more about how you as a couple will be managing your money so that you can maintain or upgrade your lifestyle in future and also, when you are retired and not earning.

You need to show that you are thinking about your combined future, and are not just pushing maths in your spouse’s face.

Return percentages, tenures and other mathematical stuff should be used sparingly in such discussions.

You are also not there to prove your spouse wrong.

Read the above statement again.

You are there to put both your finances in order to better enjoy your life in future. If you’re constantly telling your spouse to spend less, then you also know that it won’t work. You need to convince them about the real-life benefits of investing rather than focusing on reducing expenses.

Once the benefits are clearly understood, expenses will automatically start coming down to free-up funds for investing for better future benefits. And proper investing in line with well thought out asset allocation for your personal capital review at crediful can help you achieve your financial goals.

(Read how to set your real financial goals and use goal-based financial planning to achieve them with higher certainty).

This reminds me of few words by Seth Godin which I also covered in the post 40 Words To Question Your Notions About Long Term:

What are you willing to give up today in exchange for something better tomorrow? Next week? In 10 years?

Your long-term is not (just) the sum of your short terms.

Try using these lines too, if necessary. Might help. 🙂

I had this bad habit of sharing fun facts about investing with my wife – like how investment in one stock went from Rs 10,000 to Rs 400+ crores and how one man lost an opportunity to make Rs 700 crores because he sold his shares too soon. Another one I remember is that its possible to retire much before the age of 60… if one is ready to begin investing just Rs 15,000 per month or Rs 20,000 a month starting from a young age. Read this case study and you will clearly understand why.

But now I don’t need to convince her anymore. Rather it’s the other way round. In fact, when the Sensex fell by more than 1500 points in one day, it was my wife who was asking whether I bought stocks or not and whether I needed more funds to buy stocks.

I literally had tears in my eyes that day. 🙂

Now that’s enough from me. But I leave you with another interesting strategy. Here is it….

A Cheat To Actually Do it

I read about this approach somewhere online and found it worth sharing. No credits to me here…

Take Your Spouse on a Retirement Dream Date

…I have found that when you define your dream retirement, you’re much more motivated to work for it. Abstract dreams are too foggy, too intangible to stick with you, while you wait 30+ years for the payoff.

So how do you go about dreaming the right way? First of all, married couples must dream about retirement together. There’s often a disconnect between couples on this topic because they’ve never talked about it before…

…So set up a date night where you and your spouse will talk about nothing but your retirement dreams. Put everything on the table. In this conversation, you’re not concerned with how much you do or do not have saved for retirement. You’re focused only on building a clear picture of what you want your future to look like…

Sounds interesting and do-able as a first step. Right?

Now once you are done with your retirement dream date, you can do the maths and tell your spouse about how much you both need to invest on a monthly basis to realize your dream retirement together. Also, tell them that it’s possible to retire much before the age of 60. That will get their attention. 🙂

You can also try talking about how compounding works. But I think that should be part of your second retirement date, after you have already convinced them about dreaming of a beautiful retirement and also about how inflation can screw it up.

Your Parents are not your Emergency Fund. Your Children are not your Retirement Fund.

Your Parents are not your Emergency Fund. Your Children are not your Retirement Fund. Strong and thought-provoking statements. Isn’t it?
Parents Children Emergency Retirement Fund

I am sure many of you will be having gut-wrenching experience right now after reading the title of this post.

And many of you will also be feeling scared about your financial unpreparedness. But if that is not the case, then you are a lucky person who is doing just fine. You are not dependent on your parents for handling emergencies. And you are also well on your way to create a big-enough retirement corpus, which will not make you dependent on your children for post-retirement expenses.

But if you do depend on your parents for getting out of financial emergencies and you think of your children as your retirement funds, then I have only one advice for you.

You need to do something about it urgently. And you need to do it now.

If you are young or middle aged, and if you still need to ask for money from your parents to get over financial emergencies, then something is wrong somewhere.

Isn’t it?

Now when I say financial emergencies, I am not talking about taking money from parent’s to invest (generally people do so to buy real estate / property). I am talking about instances like regularly running out of money before month-ends, being unable to pay credit card bills, car loan EMIs, etc.

If these things happen once in a while, it is fine. But if such occurrences are regular, then you know that there is a problem. Either your expenses are exceeding income unnecessarily or you are not planning your future expenses properly. The situation can go out of hand very quickly. I have seen it happening with my well-earning friends. They earn well. But they are still broke for all practical purposes.

Creating an Emergency Fund is one of the first things any young person (or anyone who hasn’t done it) should do. A good target for this fund can be to accumulate 6 month’s worth of expenses (including EMIs if possible). It might sound tough to do. And I will not mince any words here – The fact is that it is not easy. And when someone has a habit of spending a lot (even more than his income), it is all the more difficult. But it is the right thing and it has to be done.

Also, even if your parents are financially capable of helping you in your financial emergencies, don’t build that thought into your financial planning assumptions. Stand on your own feet. Your parent’s have already done a lot for you in last few decades. Why treat them as Emergency Funds now?

That was about parents and taking their help for current expenses.

But what about your retirement plans?

Are you doing fine? Are you not sure about it? Or you know that you are not doing fine?

If your idea of retirement is that your sons and daughters will (happily) take care of you in your non-earning days, then frankly speaking, I don’t know what to say.

I just hope your children do as you expect them to do.

And I pray for you. 🙂 Because if they don’t, then it’s will be a very scary situation to be in.

No one wants to end up in an old-age home. I have been there many times as we regularly donate a part of our family income for helping old people. And what I see there is unexplainable. One can only feel the pain of senior people when one visits these homes. My suggestion to readers is that atleast once, everyone should visit an old-age home. You will only realize what I mean when you are there.

But coming back to our main discussion – if you are not preparing well for your retirement, then that is wrong on your part. Plain and simple.

See… I am sure you have full faith on your children. But not doing anything on your own is a clear case of inviting trouble.

Now I may sound wrong here, but if you are spending every rupee you earned on your children’s education and marriage, and are not planning to save much for your retirement, then you got it all wrong.

Helping your children is your responsibility. And so is helping your own older self in future when you are earning ‘0’ active income. There is absolutely no justification for not doing everything in your power to ensure that your retirement is comfortable.

So to cut a long story short, if you think that your children are your retirement fund, then you are neither being fair to yourself, nor to your children.

And you need to do something about it urgently. And you need to do it now.

Yes. Buying Health Insurance protects Your Wealth, not Health.

For past few weeks, I have been doing quite a lot of research on finding the Perfect Health Insurance Policy. And my research has led me to one simple conclusion.

That there is no such thing as the Perfect health insurance policy. Ofcourse there are good policies. And then, there are few great policies too. But there is no Perfect policy out there.

So should I (or for that matter anyone) avoid buying one, just because I am not able to find the perfect policy?

The answer is a big No!

It is the same as the idea that one should invest, even if you cannot beat the stock markets.

 
Health Insurance Protects Wealth
 
Now what exactly is the ‘Perfect’ in this Perfect Health Insurance Policy?

Atleast for me, a perfect policy would cover all the diseases (including critical ones), should offer unlimited renewals, have hassle free claims procedure, no co-pay clauses, no hidden clauses which I might easily overlook, no caps on room rent, fees or anything, no disease-level or category-level caps, provide lump-sum amounts in case of critical diseases, etc. And ofcourse, it should not be very costly.

Though I can easily get into my preaching-mode and say that health insurance is not an investment, the fact is that I will still love to buy a policy that is cheap and offers me the world. The money I can save because of the low cost of the so-called perfectpolicy, can be redirected towards investing for the long term.

By the way just to put it on record, I do believe that health insurance should not be treated as an investment or a tax saving instrument. Period. You might still get tax benefits for buying health insurance, but that should not be the primary reason to purchase it.

Now you might have already found a policy that meets all the above-mentioned criterias of a perfect policy. But I am yet to find my perfect policy. Or maybe it exists and my definition of ‘not-very-costly’ is different from other people. In any case, I have moved on and purchased a policy which might not be perfect, but is still good enough.

The point that I am trying to make is that even if a policy passes on 7 of the 10 parameters you set, then you should buy it. Don’t wait for too long and try your luck.

This brings me to the topic of the post.

How can health insurance protect your wealth? I mean, isn’t health insurance something which one buys for health?

Yes it is.

Before we move forward with our discussion, please think and answer the following 3 questions:

Q1: Will buying a health insurance help you stay healthy?

Q2: Will not buying a health insurance, result in your poor health?

Q3: If not for health, then why am I even bothered about this whole concept of health insurance?

Got it?

I am sure you have the right answers. But for the sake of making this post look complete, I will tell you the answers to first two questions.

And the answer is NO for both.

Buying a health insurance will not help you stay healthy.

Not buying a health insurance, will not make you unhealthy.

Wasn’t that obvious?

And now when you think of it again, it might seem strange that you never buy health insurance for good health. And to be brutally honest, majority of people buy it for tax benefits!!

But I am telling you…. One visit to a hospital without health insurance and you are sure to realize the importance of health insurance! I have seen it happening and it can be ugly. Really ugly.

So…

What exactly is this Health Insurance?

Simply speaking, it is an insurance coverage that covers the cost of an insured person’s medical and surgical expenses. Sowhen you buy a health insurance policy, you are paying a small premium now, so that you don’t have too pay large hospital bills (if any) in future.

That’s it.

Health Insurance is neither a tax-saving product nor an investment. It is just a contractual promise by the health insurer, to pay a part or all of your hospital bills in case there is a need. Though there are many clauses and terms and conditions that govern this contract, we can ignore them for the sake of keeping this discussion simple.

So the whole point is that you don’t want to pay the large hospital bills. And rightly so. Who wants to pay them? No one.

But let us suppose that for some reasons, you don’t buy health insurance. And unfortunately, you get hospitalized and the bill to be paid is Rs 10 lacs. Now your health is not insured. So there is no one to pay the bill, except you. So you end up paying the bill by liquidating fixed deposits, selling shares, gold, etc.

Result is that you lose a major part of your wealth that you had accumulated.

Had you had a health insurance policy, you could have easily saved your wealth from being used up in paying medical bills!

Now think…

 

Doesn’t buying Health Insurance help protect your wealth?

It does. No doubt about that.

Lets take another example to drill down this concept.

Now once again, you get hospitalized and the bill is Rs 10 lacs. But in this scenario, you had a health plan with a coverage of Rs 3 lacs. So you end up paying the remaining Rs 7 lacs.

Better than the first scenario. But it still makes a dent in your wealth.

Now even after getting it right, i.e. having bought a health insurance policy, you end up getting screwed. And that is because you had low health coverage. The reason can be lack of adequate funds on your part, or intentional decision to save some money by taking a low premium plans offering lower coverage.

Whatever the case may be, you end up getting screwed.

I really hope that you understand the importance of having health insurance in protecting your get-rich-plans.

 

In reality, it’s all linked. You. Your Health. Your Wealth. Everything.

You save and invest to get rich. But you try to cut corners by saving a few thousands and don’t buy health insurance. Bad luck strikes. You get hospitalized. You pay the bills by selling your assets. All your savings are gone. Your get rich plan is screwed. You start saving and investing again. You buy health insurance this time. But you have lost out on the benefits of compounding, because you sold all your original assets. You can never be as rich as you could have been in first place. And that is just because you saved a few thousands by not buying a health insurance in first place.

There are quite a lot of points which come to my mind about health insurance and various scenarios linked to it. For example, what should you do if your health is already covered by your employer’s health plan, whether your policy can help you beat inflation in medical costs or not, how to buy health insurance if you don’t have a lot of surplus funds, etc. But I guess its best to dedicate individual posts to atleast a few of these thoughts and scenarios, instead of clubbing all of them in just one post. So I will be doing such posts soon.

Do share your personal experiences with health insurance and if you have more ideas that can help me further explore the concept of health insurance, then do connect through comments or mail me at stableinvestor@gmail.com