· First priority should be to have adequate life and health insurance for the entire family. Planning for unfavourable time should precede planning for favourable time. An umbrella health cover of 3-5 lakh for the family and life insurance cover of 10-20 times annual salary for every earning member should be sufficient in most of the cases.
· Second priority should be to build a house for the next generation. It is the best asset we can give to them because as the population grows, good housing in good locations will become more and more expensive with time. For this purpose 20% to 40% of the income can be allocated.
· We need to keep aside cash requirements to meet general expenses and fulfil commitments like marriage, higher education, loans repayment etc. for next six months/one year in short term bank deposits/liquid assets. This is based on individual needs and cannot be generalized.
· Around 10% of earnings should be for retirement planning so that you can live with pride and respect in old age. It can be invested in PPF, pension funds, NSC, KVP etc. (safe returns). Fortunately for salaried people this is taken care of by the PF component of the salary to a great extent.
· After fulfilling all of the above, we can think of investing 10% to 30% of our net worth (Assets – Liabilities) in equities. The lower limit ensures that we benefit from the high returns offered by equities while upper limit ensures that we are not broke financially in adverse conditions. People who are more experienced and can withstand the shocks can go for higher exposure.
The above guidelines are general and can be customized for an individual based on his needs, age, risk taking abilities, family commitments etc.
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