The 12-15-20 investment formula can make you a millionaire!

In personal finance, not committing ‘catastrophic’ mistakes has a huge role in creating wealth. Most of these are traps set by insurance agents, bank relationship managers and service providers (like insurance companies, credit card companies, banks, etc).

By avoiding these mistakes, a lot of money can be saved and can be used for wealth creation.

This topic is for everyone, whether you manage your money yourself or through your advisor, it will go a long way in managing your finances.

The common mistake is not taking adequate life insurance.

The neighborhood LIC uncle will act as messiah and will recommend you one of the products with highest commission. Here highest commission is not in percentage terms but in absolute rupee terms. Term insurance plans have the highest commission in percentage terms but as the premium is small, absolute commission in rupee terms is not significant.

So, in traditional insurance plan, life cover is generally 10X of the annual premium. Even if you are contributing Rs 1 lakh, Rs 2 lakh or 3 lakh per annum, life cover will not be sufficient to provide adequate corpus to fulfil the financial loss of the family. Never ever buy traditional plans as they do not provide enough cover.

Think about a person Mr. Hero, who let’s say is earning Rs 20 lakh per annum. Let’s say he invests Rs 5 lakh per annum in a traditional life insurance policy.

The problem is, even after committing 25% of the annual earning towards life insurance, the life cover, which is generally 10 times the annual premium in traditional plans, is only 2.5 times the annual package.

In case of any unfortunate event where Mr. Hero dies, the dependent family will only have Rs 50 lakh. This amount will not be enough to generate enough risk-free income which can replace the monthly inflow Mr. Hero was bringing.

The hardships for the family will be amplified in case of outstanding housing loan. All the long-term financial goals will also take a back seat and the lifestyle of the family will come crashing down.

If you are taking a life insurance, go for a basic term insurance and make sure the sum insured is at least 10-12 times of the annual income. This kind of corpus will be able to generate a decent income and family will surely be at emotional loss, but financially the dependents will be covered.

Please consult your financial planner to plan for sum insured, I have just generalised the 10-12 times sum insured and this multiple may be different depending on the person circumstances.

(The writer is Chief Goal Planner, Money, Mind & Milestones. Views expressed are personal)