This Republic Day Write Your Own Financial Constitution

A constitution primarily is a document that details the rights, obligations, privileges, duties and responsibilities of the people living within the corridors of, and leading that country. It details the rule of governance. Without a constitution it will be difficult to live like a civilised society. We would be living like in stone-age where “Might was Right” and jungle raj prevailed all over.

Like a country, each individual should also have his or his family’s own financial constitution detailing various financial objectives and the process to achieve those financial objectives, rules that will govern the way its finances will be managed etc. This applies to all individuals without exception and is more popularly known as “Financial Plan”.

Like a constitution your financial plan should have a Preamble and different schedules.

Preamble – is a brief introduction to the main document. For our purpose it should briefly explain that what financial objectives you would like to achieve though this financial plan. For example, “The purpose of this financial plan is to invest current and prospective funds so as to ensure that the family have sufficient funds to maintain a well-deserved lifestyle, protect financial interests of the family – present and future and ensure smooth distribution of wealth among the family members.”

Schedules – Constitution of India have twelve schedules. Ideally your financial constitution or the financial plan should contain following ten schedules:

First Schedule – The first schedule should detail the territories of the family. It will contain details of all the family members with respect to their age, relation with head of the family, dependency on family funds etc.

Second Schedule – This will contain details of specific needs of each individual member as well as the family – current and future. Specific individual need will include needs like medical treatment, education etc. and family needs would be like buying house or car or family vacation etc. Along with need it should also have detail how much funds will be required to meet that particular need.

Third Schedule – this will contain details of all the financial and physical assets, current and prospective income & expenses and the liabilities like loans. This will be required to prepare the net worth statement and income & expenditure account of the family and design the investment plan.

Fourth Schedule – This should contain detailed calculation of funds that will be required to meet various needs as detailed in second schedule. It will also contain data, logic and assumptions used for these calculations.

Fifth Schedule – This will address life insurance requirement for head of the family and any other member of the family. Using human life value calculator one would know, how much amount his or her family will need in the event of untimely demise of the head of the family. Should your current investments after some mark down, are more than the funds your family needs, it’s good otherwise you need to buy life insurance cover on your life to the extent there is shortfall.

Sixth Schedule – This will have details of all your general insurance requirements like motor insurance cover for all the motor vehicles that the family and its members own, health insurance for the family – a family floater policy, fire and burglary insurance for your home & business and other general insurance needs.

Seventh Schedule – This will contain your investment policy. It must define your risk appetite and asset allocation. You may define range for the allocation and list down the conditions for using or breaching the lower and the upper limits of the range. The document will also define the interval & frequency at which the investment allocations and the portfolio need to be reviewed and rebalanced. It may further define the sub limits for individual investment product.

Ideally one should list down all of his financial objectives along the time line. It helps make good assessment of how much and of what type of risk one should take.

Eighth Schedule – Basis your investment policy and depending on your financial objectives and cash flow position, this schedule will have detailed investment plan. It will derive information from third and fourth schedule and devise an investment plan that will help you achieve the financial objectives listed in the second schedule. Your investment portfolio must ensure adequate diversification among and within different asset classes viz equity, debt, real estate etc. Always bear in mind the taxation and entry/exit charges of individual investment product.

Ninth Schedule – Make a list of all the assets you own, investments you have made & loans you have outstanding. Also incorporate the details of the contact person(s), who needs to be approached after you, to manage and get transferred these assets & investments by your heir.

Tenth Schedule – This schedule will address the issue of wealth distribution among the family members after you. Ensure that you have made nominations to every investment/account wherever permitted. And even after nomination you must create a will clearly marking which asset/investment will go to whom. In the absence of nomination & will, it will be very difficult for your heir to claim your wealth.

You have seen from the above how important it is to write your own constitution. It not only brings discipline in your investment but also helps smooth transfer of wealth to next generation. You may write your own constitution or may take help of experience financial planner. So when are you writing your Constitution?