Conventional financial planning revolves around certain thumb rules. You have probably heard your parents and grand-parents counselling you to not spend more than what you currently earn and to save and invest in traditional saving/investment instruments for your old age. But do these conventional thumb rules being passed downsince generations still apply to the youth of today? Probably not!

Let’s look at what’s changed in the last decade or two which leaves us questioning the conventional financial planning thumb rules.

• What’s changed – Higher life expectancy and advancement in medical technology

  As per a recent WHO report, the average life expectancy in India stands at around 68 years, a jump from 58 years in 1990.

  This means you might spend more years of your life as retirement years and thus would need a higher retirement corpus.

  What does that change –
  Old rule: Put away 10% of your income for retirement
  New perspective : Put away at least 20% of your income for retirement

• What’s changed – Lifestyle expectations and cost of living

  While inflation today may not be considerably higher than that 20 or 30 years ago, but the lifestyle expectation and the subsequent cost of living has definitely increased in the recent generation. Gone are the days of ‘simple living high thinking’. Today everyone craves for more and more luxuries. This means that you need to earn more than what your parents or grandparents probably needed to.

  What does that change –
  Old rule: Invest in traditional investment options
  New perspective : Opt for investment products which may give you higher returns, especially in you earlier years when your risk appetite is likely to be higher

• What’s changed – Better developed and regulated financial markets

  Our parents and grandparents have probably been struck by several stock market scams and crashes in their time making them risk averse. But today with better developed and regulated financial markets and more accurate and widespread dissemination of information, the youth are more informed and can take higher risks with an aim to earn reasonable returns.

  What does that change –
  Old rule: Stock market is gambling; do not dabble in it if you are not a professional
  New perspective : Educate yourself on the nuances of the stock market or hire a professional to take advantage of the potential earnings from the stock market whilst balancing your risk

• What’s changed – Better developed banking sector with better and cheaper credit facilities available

  Expensive personal loans and credit cards, yes still stay away. However, there are loan offerings today which can actually help you optimally achieve your financial goals.

  E.g.: You take a home loan of INR 50 lacs on which you pay interest at say 8 to 9% over 20 years, means you end up paying approx INR 1.07 crores. In the same period of 20 years however the real estate appreciation could be significantly more and so taking a home loan to buy property may work out to be a good deal.

  What does that change –
  Old rule: Don’t spend more than you earn - No loans is better
  New perspective : Don’t be afraid of opting for loans for achieving long term financial goals

• What’s changed – Shift to nuclear family set up

  With families increasingly gravitating towards a nuclear family set up, there is lesser dependency and fewer helping hands in times of crisis. In such a scenario it is safer to have a higher amount in your emergency fund. Additionally, several cases like a sudden job loss or companies offering sabbatical options to their employees in case of personal emergencies or employees opting out to explore alternative career options; calls for a higher emergency fund.

  What does that change –
  Old rule: Contingency fund of around 3 months of expenses considered sufficient
  New perspective : Contingency fund of around 6-9months of expenses is more appropriate

It is said that –‘the only thing permanent in life is change’. So change with the changing times and re-assess your personal financial planning to make it more relevant.

Source: https://economictimes.indiatimes.com/wealth/plan/rules-of-financial-planning-have-changed-sticking-to-old-ones-could-be-disastrous/articleshow/68435833.cms

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