Meticulous planning converts your money dreams into reality
Know your money situation better and build a detailed plan around it. Use the right rules to oversee your financial plan which can in turn help you achieve your financial goals
Financial planning is a procedure that provides you a clear roadmap of your personal financial life. It helps you meet all your life’s expenses – both the expected ones which could be buying a home, car, travelling abroad for leisure, children's education needs, their marriage and own retirement needs. It also prepres you to deal with unexpected events such as medical emergency due to illness/injury, creating a safety fund to compensate for loss of a job.
How to go about financial planning
Assess your present financial situation:
Know your money situation better and build a detailed plan around it. Use the right rules to oversee your financial plan which can in turn help you achieve your financial goals
Financial planning is a procedure that provides you a clear roadmap of your personal financial life. It helps you meet all your life’s expenses – both the expected ones which could be buying a home, car, travelling abroad for leisure, children's education needs, their marriage and own retirement needs. It also prepres you to deal with unexpected events such as medical emergency due to illness/injury, creating a safety fund to compensate for loss of a job.
How to go about financial planning
Assess your present financial situation:
When you are going about financial planning process, the first thing you need to do is to evaluate your current financial status. You should assess that where do you stand today in terms of income, expenses, cash flows, investments and assets and liabilities, life and health insurance coverage. All this data will form the inputs in preparing your financial plan.
List all your financial goals:
List all your financial goals:
It is important for you to write down all your goals so that you become clear which goals are more important and needs priority over others and which ones are insignificant. Financial goals can be of three types: short, medium and long - term. For example a short-term goal could be your upcoming marriage, a medium - term goal could be your children's education and a long - term could be your retirement. Ensure that you assign a target date to all your goals while putting them down on paper. This is required so that you could calculate the goal’s estimated cost in the future.
Find out the alternative line of actions:
Find out the alternative line of actions:
While making a financial plan you should make sure that the plan is flexible enough to alter in case of changes in life situations. As the future is uncertain and you never know what is in store for you, you should also plan about what alternative course of action you are going to take if any contingency arrives or things do not work out as you expected them to.
Make a financial plan and execute it:
Make a financial plan and execute it:
In this stage you actually come to make a comprehensive financial plan taking into account all your goals (short, medium and long - term). The Plan will specify your asset allocation strategy, suitable investment options (e.g. mutual funds, equity investing, debt products, traditional saving schemes etc.), life and health insurance needs. Its execution will involve the actual process of purchasing the investment and insurance products.
Monitor and review financial plan:
Monitor and review financial plan:
It is important to monitor the progress made on your financial plan. Also understand that financial planning is not a static process, but a dynamic one. Therefore, you also need to periodically review your plan to evaluate the effect of changes in your goals, life style, income levels, financial situation, tax situation, new tax rules, new products and changes in market conditions so that you remain on track with your long-term goals.
Some rules of thumb that can help you during financial planning
Save at least 20% of your income - The thumb rule says you should save at least 20% of your take-home pay. If you’re earning Rs. 600,000 per year that means you should be saving at least Rs. 10000 per month.
Have at least six months of living expenses in an emergency fund - An emergency fund is necessary to cover expenses when there is a sudden loss of income or any other financial emergency. So, if your monthly expenses are Rs. 30000, you should try and keep around Rs. 150000 in your emergency fund.
Get a life insurance policy worth at least 8 to 10 times your annual income - As per a rule of thumb you should have a life insurance policy that is worth at least eight to ten times your annual family income. Therefore, with a combined family income of Rs. 6 lakh you should have a policy coverage of around Rs. 50 lakh to 60 lakh. The coverage amount can differ depending on the number of dependents, size of the loans, future goals, and current savings.
100 minus your age is the percentage of your portfolio that should be in equities - The thumb rule says that you need to subtract your age from 100 to find out how much of your portfolio should be in equities. So a 35-year-old should have 65% of their portfolio in equities with the remainder in bonds, gold and cash. While bonds offer investors stability and income, stocks tend to carry more risk but can offer better returns in the long-run. This is why the younger you are, the greater percentage of your portfolio should be invested in equities.
Start investing for your retirement at an early age - Retirement planning is a crucial aspect of financial planning but it is the one that is often overlooked. Retirement is such long away that most of us tend to procrastinate to plan for it. But the fact is that the sooner you start planning for your retirement, the better off you will be in the end. It is not necessary that you assign a large amount to your retirement portfolio, you can start with a small amount, but starting early is important. While planning a retirement corpus do not forget inflation as Inflation is the silent killer of wealth.
Start tax planning from the beginning of the year itself - The best time to start tax planning is at the beginning of the financial year. This adds the necessary discipline to your financial life and ensures that the tax saving instruments you choose are integrated into your broader investment portfolio and are in line with your risk profile and financial goals.
Pay off highest interest rate debt first - To many people it may seem against intuition to use money to pay to the credit card company rather than invest it but you should know that paying down the plastic cards can save you a lot of money as they have very high interest rates. If you’re paying a 35-40% interest rate on your credit card, it is unlikely you are going to match or beat that in any investment.
The importance of a secure financial future cannot be underestimated and a safe and comfortable financial future calls for a detailed planning about one’s goals and finances. Therefore in order to ensure a secure financial life a meticulous financial planning is imperative for everyone. One should remember the saying “If you fail to plan, you plan to fail”.
A meticulous and detailed financial planning can go a long way in helping you to manage your expenses, achieve your financial goals and converting your dreams into reality. Although financial planning is not a rocket science but not all people have the time and the ability to manage their financial future on their own. For those people who do not have the time and the ability it is better that they take the help of a professional financial planner.
Happy Investing
Some rules of thumb that can help you during financial planning
Save at least 20% of your income - The thumb rule says you should save at least 20% of your take-home pay. If you’re earning Rs. 600,000 per year that means you should be saving at least Rs. 10000 per month.
Have at least six months of living expenses in an emergency fund - An emergency fund is necessary to cover expenses when there is a sudden loss of income or any other financial emergency. So, if your monthly expenses are Rs. 30000, you should try and keep around Rs. 150000 in your emergency fund.
Get a life insurance policy worth at least 8 to 10 times your annual income - As per a rule of thumb you should have a life insurance policy that is worth at least eight to ten times your annual family income. Therefore, with a combined family income of Rs. 6 lakh you should have a policy coverage of around Rs. 50 lakh to 60 lakh. The coverage amount can differ depending on the number of dependents, size of the loans, future goals, and current savings.
100 minus your age is the percentage of your portfolio that should be in equities - The thumb rule says that you need to subtract your age from 100 to find out how much of your portfolio should be in equities. So a 35-year-old should have 65% of their portfolio in equities with the remainder in bonds, gold and cash. While bonds offer investors stability and income, stocks tend to carry more risk but can offer better returns in the long-run. This is why the younger you are, the greater percentage of your portfolio should be invested in equities.
Start investing for your retirement at an early age - Retirement planning is a crucial aspect of financial planning but it is the one that is often overlooked. Retirement is such long away that most of us tend to procrastinate to plan for it. But the fact is that the sooner you start planning for your retirement, the better off you will be in the end. It is not necessary that you assign a large amount to your retirement portfolio, you can start with a small amount, but starting early is important. While planning a retirement corpus do not forget inflation as Inflation is the silent killer of wealth.
Start tax planning from the beginning of the year itself - The best time to start tax planning is at the beginning of the financial year. This adds the necessary discipline to your financial life and ensures that the tax saving instruments you choose are integrated into your broader investment portfolio and are in line with your risk profile and financial goals.
Pay off highest interest rate debt first - To many people it may seem against intuition to use money to pay to the credit card company rather than invest it but you should know that paying down the plastic cards can save you a lot of money as they have very high interest rates. If you’re paying a 35-40% interest rate on your credit card, it is unlikely you are going to match or beat that in any investment.
The importance of a secure financial future cannot be underestimated and a safe and comfortable financial future calls for a detailed planning about one’s goals and finances. Therefore in order to ensure a secure financial life a meticulous financial planning is imperative for everyone. One should remember the saying “If you fail to plan, you plan to fail”.
A meticulous and detailed financial planning can go a long way in helping you to manage your expenses, achieve your financial goals and converting your dreams into reality. Although financial planning is not a rocket science but not all people have the time and the ability to manage their financial future on their own. For those people who do not have the time and the ability it is better that they take the help of a professional financial planner.
Happy Investing
Source : Moneycontrol.com
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