I was always fascinated by defense personnel’s life – their style, attitude & discipline always inspired me. The reason was not that the “Girls like the men in uniform”, but I was always surrounded by them. My father was an Army man, my grandfather had also retired as Major General & my uncle is still serving the nation. Last week I met my uncle – I told him that “It was always my dream to join the army & save people’s lives”. His reply was “What you are doing these days is equal to that”, I screamed “HOW??” He said “You are saving people’s financial life, which is equally important.” I really felt good & thought of writing something for Defense personnel, which can help them to plan their financial life better.
When I started my career in one of the largest Personal Finance Companies, my supervisor always persuaded me to get more army customers because of my background. In fact, if an agent has army clients, he was given more respect and was thought to be well established. Later on when I got the understanding of sales, then I came to know that the simple reason was Defense Personnel were very easy targets of mis-selling and since they had very little understanding, agents and distributor milked them for what they were worth. Like every individual, they also need Financial Planning and also needs to take care of his finances. The very aim of writing this piece is to convey that the outside world is ready to sell you all that you do not require with no proper understanding of your requirements. Beware!
But before going further, let’s understand financial planning in simplified language. “Financial Planning is the process of meeting your life goals through the proper management of your finance.” Finance doesn’t mean just investment it also includes your liabilities, your cash flow, your insurance etc. Financial Planning will answer three important questions:
- What are your financial goals?
- Where you are today in relation to your goals?
- How will you get from where you are today to your goals?
Now let’s try to understand basic components of financial planning, from a defense personnel’s financial life:
A. Retirement Planning – It is one of the most important goals for everyone but in current scenario it is even more so due to – society moving towards nuclear family system, higher inflation & medical cost, changes in lifestyle etc. Defense personal are bit lucky as they get family pension on retirement; but there is one negative thing attached with this – pension keeps people in illusion that pension will be sufficient for them to have a comfortable retirement. But they forget that pension will be close to half of their income and few of these expenses that are currently borne by the exchequer, are not available after retirement. To cover the expenses, they should check what will be there monthly requirement after retirement & how much of it will be covered by pension. After this they should calculate the corpus required at retirement, to understand the deficits that might be there. From the total required corpus they should reduce the lump-sums that they will receive. So now they have a target amount – for this they have to start investments.
B. Cash Flow Management – Cash flow includes your income, expense & investment. Managing finances can become difficult due to transferable job. If proper attention is not given to documentation & maintenance of proper bank accounts, it can result in skipping of EMI & premiums, which have negative consequences. Defense personnel should always keep 2 separate saving accounts – one for salary & basic expenses and another special account for investment, loan EMI & insurance premiums. They should open this special account where they can get payable at par cheque book, ECS facility & online banking. They should maintain this account throughout their life – every month they should transfer the required amount to this account. They can also create an emergency fund equal to 3 months expenses, in this account.
C. Investment Planning – What’s your formula? Income – Expense = Investment or Income – Investment = Expense. Second formula will lead to financial success. Investment should be done in goals and not products. One of the basic long term goals is child education & marriage – they should find how much they require in future & find out the monthly contribution for that. Buying home can be a goal; but as they keep moving from one place to another, they should buy it at a place where they want to finally settle down. As they can’t keep an eye on their property on regular basis they should only buy properties which are approved by local authorities & papers are clean.
D. Insurance – There is nothing in this world that can fill up the social vacuum that gets created if one is not there, but there are other issues like financial loss which can be recovered through insurance. There is some provision of family pension & some insurance on death of defense person but that’s very small. Insurance is one of the greatest inventions in the field of personal financial products but it becomes fatal to financial life and costly once you endup purchasing a wrong insurance solution. You should not buy endowment or ULIP policies for insurance need. You should take help of some professional to calculate your insurance needs and take term plan & accidental policy to cover them. You don’t need health insurance during your job but once you retire, you should immediately buy a decent mediclaim policy for yourself and dependants.
E. Tax Planning – It is simple for defense personal as normally they have one source of income. They make some tax saving investment – taxes are deducted from their income & finally they get the form 16. For saving tax under section 80 C they should use EPF, PPF, Mutual Funds & ELSS funds rather than putting money in expensive insurance policies. They just have to deposit form 16 to the income tax department & it’s done. Even all their lumpsum retirement benefits like gratuity, commutation of pension & provident fund are tax free which is not a case for private sector employee.
F. Estate Planning – They sometime are placed at inaccessible places – to keep financial life simple they should have a power of attorney signed in favor of one of the family members. They also work on some risky assignments to avoid some confusion in case of any negative consequence they should properly write a WILL.
Few important points that defense person should keep in mind:
1. You have very high chance of getting mis-sold expensive financial products due to your transferable job & fleeting touch with the financial world. Investigate before you put your hard earned money.
2. For you it’s really important to have a proper written financial plan, by a Financial Planner. It will serve two purposes – first it will eliminate risk of mis-selling & second in case if you are not reachable someone else from your family, can act on that.
3. All your investments and bank accounts should be in either or survivor basis – so even if you take some decision in far flung place it can be executed by other members.
4. Some time you earn extra allowances due to your location or some foreign assignment – invest that amount for long term goals rather than spending it.
5. Some cases are seen where larger sum assured for defense persons are denied – so keep adding small sum assured policies from different insurance companies.
6. Your job is secured & has zero risk, as far as your income is concerned. So try to make your portfolio a bit aggressive, try to understand risk. I am not suggesting that you go for direct equity but start with systematic investment plan in diversified equity mutual funds.
7. If you are still not ready to participate in mutual funds or you want to start with very small amount – you should increase your EPF contribution rather than going for insurance policies for investment purposes.
8. There is a special provision through which, part of your salary can go directly into some investment after taking permission from you. But make sure that such amount is not going in some expensive product like ULIP or low return product like endowment plan.
As a person from the armed forces, you have some qualities like discipline, managing skills, decision making power & investigation; that can do wonders if properly used in managing your money. With these qualities in your personal financial life – along with protecting freedom of our country, you will also be achieving financial freedom.