Money is a means that allows us to reach our end goals. Remember, Money is a means, not an end. So it is important to consider our ‘end goals’ and accumulate, protect and manage money so as to reach such end goals comfortably. Without considering specific ‘end goals’, it doesn’t make much sense to keep on working to accumulate more and more money because while doing that you may miss the finer things in life which money can’t buy.

As per financial planning guidelines, one should have an emergency fund, financial protection plan, asset allocation plan, asset accumulation plan, a regular income plan and asset transfer plan.

1. Emergency Fund

Any emergency is marked by two important incidents - one, it is an event that is not predictable and, secondly, once it occurs, it will need immediate action. A temporary disability or a job loss could be among those undesirable events. Liquid cash is what one needs at this stage. Liquidating long-term savings may not be the best of options at such time as each such investment is linked to a specific goal. The most ideal are the schemes from the liquid funds category of mutual funds (MFs) which invest in debt instruments, such as, treasury bills, commercial papers and the call money market which have short-maturities. This keeps the returns stable and less volatile. Their objective is to preserve principal while yielding a moderate return and offering high liquidity.

In the higher income category, having a reasonable amount of money in short-term debt funds makes sense since capital gains or dividends will be more tax-efficient than interest income. Equity funds or stocks are not the right place to park emergency money.

There’s no fixed rule as to how much emergency cash you should keep. As a thumb rule, three to six month’s household expenses can be kept as emergency fund depending on your age. Roughly the amount that gives you the confidence to combat emergencies in your household should be enough. Anything more can actually affect your investment portfolio.

Those in their 20s and 30s might need more and should aim to garner funds for about six months’ expenses. In the younger days, one should cover things such as instalments for loans and medical expenses for aged parents. The amount of emergency funds will actually increase in old age as the probability of emergencies will increase.

2. Financial Protection

Insurance transfers the financial risk of some of life's events to an insurance company. A sound insurance strategy can help protect your family from the financial consequences of those events. There are various financial risks which can be managed with the help of an apt insurance plan.

Buying a term insurance plan is like buying yourself peace of mind. A term insurance plan assures that the cover amount will take care of the family’s financial obligations and their daily needs, in absence of the chief breadwinner. It should be the foundation while building a financial roadmap. Being extremely affordable, the risk-reward for term insurance plans is fabulous.

Term insurance is absolutely essential for anyone who has dependents as it largely benefits their family in times of need. While deciding the life cover, one should ideally take a cover which is 15-20 times their annual income. Other specifics like number of family members, goals and liabilities should also be factored in.

Nowadays, Term Plans are possible in different variations. Instead of a regular premium payment plan, one can opt for a limited period premium payment plan if he wishes so. There are term plans which, in addition to giving financial protection throughout the policy term, also give back the premiums paid if the person is surviving the term. There are also term plans which can be taken for the whole life. Husband and wife together can take a 'Joint Life Term Plan' wherein both will have life cover plus critical illness cover.

Health Insurance or Medical Insurance is another important financial protection plan that one should never avoid. Critical illness cover can also be added to enhance one’s protection and this is becoming more relevant in today’s society which has changing lifestyles and hence are more prone to critical illnesses.

3. Asset Allocation

A portfolio that lets one sleep well is what an investor should aim for.

History shows that economists have failed to predict practically all recessions, which were recorded in financial history.

Most events that shaped the world were Black Swan events. We can only understand the world backwards, but it is very difficult and almost impossible to predict things. It’s good to understand macroeconomics, but it’s also important to know its limitations. So being sure about something should never be part of the plan.

It ain’t what you know which gets you into trouble. It’s what you know for certain that ain’t true - Mark Twain

Doubt is a good tool, when one is investing. This keeps an investor humble and helps to invest with right asset allocation. In the beginning of 2020, there was not a single research report that said economies the world over can slow down and markets can enter a bear phase due to a pandemic. Risk is what is left when you have thought about all things that can possibly take place.

Traditional financial textbooks teach one to look for efficiency, but in the real world of finance one should build a financial plan, which is effective. A plan where one can achieve his or her financial goals with the least amount of personal stress.

Harry Markowitz got the Nobel prize for designing an algorithm to design the most efficient portfolio. However, when it came to managing his personal money, he had 50% of his allocation in equity and 50% in fixed income. His explanation to his allocation was, “With this allocation, I can sleep well.”

Personal finance is more personal and less finance. The best allocation among asset classes is the one where an investor can comfortably say at all points of time that his view on markets is: “I don’t know and I don’t care.”