The fruit that we are enjoying is the effect of a seed sown in the past and the same will repeat with our future. This is a cycle that no one can escape. It may sound like a quote from the school of thought but this is how life works and the same applies to our finances.
The financial state that we are in now is the result of our actions or our parents, from the past.
Last December, Vijay started to get worried about his financial situation as he was facing a deficit in his cash flow and was not able to plan for his future. Upon analyzing his finances, the following was revealed.
- His father took a life insurance policy 15 years ago for which he has been paying Rs.10,000/annum as premium for a maturity amount of Rs.3.82 lakhs, the policy’s term is 20 years. As Vijay’s father could not pay the premium after 10 years of the policy, he took the responsibility of paying it. The maturity value of Rs.3.82 lakhs seemed a big amount back when his father took the policy but today the value of such money degraded in accordance with time due to inflation. Moreover, the policy just gives him 5.8% for a holding period of 20 years. Vijay currently holds 5 policies of the same kind out of which 3 were taken by his father and the premium of all in total is Rs.2 Lakh/annum.
- A medical emergency where he needed INR 5 lakh forced him to take a personal loan and a credit card loan. In a short span of time, liabilities piled up for him. For clearing the debt he had to allocate a big chunk of his monthly surplus.
- 5 years ago Vijay bought a new home and started paying his home loan EMI. His EMI is eating a major part of his surplus.
- Vijay’s employer gave him an option for health insurance coverage through his workplace, but he opted out as he wanted a higher take-home income.
- On one of his relative’s advice, Vijay invested some of the surpluses in stocks which his relative bought for herself as she was getting good returns. After a few years, the instrument started to give Vijay negative returns. He was losing money and his capital also started to erode.
As the past has its effects now:
If we look at life insurances, earlier Vijay’s father took all such policies for the financial benefit of his son but they are actually draining Vijay’s surplus now. Not only his father but Vijay also made the same mistake of taking similar policies some time ago, these will mature to a mere amount affecting his future finances.
Because of emergency, rather than planning for his future, Vijay is now draining his potential surplus to clearing his debt. Instead, an emergency fund from the past would have helped us at the need of the hour.
A home is necessary, but it is not compulsory for us to own it. Here Vijay could have saved his EMI and invested it for future financial goals keeping home as one.
Not just acting upon a decision in the past has its effects but also not acting in time. Timely health insurance could have saved Vijay from spending money from his pocket and sometimes it is not only our past decisions that affect our present but also our relative’s recommendations as we act on those because of affinity. If we compare Vijay and his relatives, the finances or financial products are not common or generic. It is better to opt for a financial planner rather than end up losing money and also your relations.
Undoing the past?
Not only Vijay, but there are also many people among us who have done things like the above in the past. All such decisions taken some time ago have a strong impact on us now and also on our future but we cannot go back and undo the past, what we have in hand today is our tomorrow, it is time for us to take the right decision now so that we or the next generation can reap its positive effects.
Undoing the present?
As we think about what has to be done now? There are two things that come to our mind. First, analyse the present and second plan for the future.
Analyzing the present is to re-look the current finances and check which activities of our past are affecting us now and our future. It could be anything like unnecessary or overspending, wrong investments, inefficient insurance purchases, all such things should be immediately rectified. This activity helps us stop our money from going in vain and also form a surplus for the future.
What’s in for the Future?
Now that we have rectified the present, we have to plan for the future. Before rushing to do so, one has to clearly understand many aspects of his/her finances like risk profile, the time horizon of goals, right products to invest and so on. As individuals with a zeal to learn and do things on our own, we may opt for a DIY method, but it’s a strict No when it comes to financial planning. One has to take help of an expert because we already tried to do something in the past for a better future and may have not seen any effective result. Moreover, an expert like a Financial Planner will also help you rectify our current finances in case if we missed any.
As the past echoes back on our present and future, plan your current finances well to see a prosperous stress free financial life in the future.