"Many People Take No Care of Their Money Till They Come Nearly to the End of it, and Others do Just the Same With Their Time."
- Johann Wolfgang von Goethe
Financial Planning and its Benefits
As human beings, we are all blessed with the ability to think and act. Our minds are the best supercomputers that have the ability to think and plan for the future ahead. One of the most important things to do, therefore, is to plan yourfinances in order to keep your future secure. Financial planning is of utmost importance because it concerns not just your own, but the future of your loved ones as well.
When you have planned your financial future, you will no longer have to worry about long term life goals or even unforeseen expenses as a medical emergency, accident or a job loss. If you adopt a disciplined approach towards your money, you can put away that little extra amount each month from your budget and can use it on a rainy day.
Most of all, proper financial planning leads to the ultimate goal of living a comfortable retired life, when there is no longer a paycheck coming in. After you have worked hard all your life, you can put your two feet up and enjoy your retired life in style! But all that can happen if you go about with financial planning when you are young.
If you do not know where to begin, here are seven easy steps that will help you go about with your financial planning:
Set Your Financial Goals
The very first step of financial planning is setting of goals. You have to identify your goals and assign a value to each of them. Your financial plan must be divided into short term, mid-term and long term goals. Depending upon the stage of lifecycle that you are in, your goals can be categorized under the following broad heads:
- Owning your own home
- Education of Children
- Marriage of children
While identifying your goals, always keep in mind that you have to take into account emergencies and plan your present and future strategies accordingly.
Plan Your Investments
Budgeting is a very important part of planning an investment strategy, so once you have identified your financial goals, divide your income into three heads:
Your investment strategy should depend upon the following
- Your risk taking ability based upon your age, income and number of dependents on you.
- How much of a risk you are willing to take depends upon your appetite for risk.
- You must also take into consideration your knowhow about financial instruments and how much time you can spend monitoring your investments.
Do bear in mind that though high risk instruments deliver high returns, as compared to low risk instruments, they also require some amount of technical know how and the ability to track the markets. It is therefore very important for you to study the various investment options and their implications carefully, before you decide to take the plunge.
While you can hope and pray that everything goes well in your life, there is no ruling out the possibility of mishaps. In order to safeguard your family in case of any untoward incidents, you need to be adequately insured. The three categories of must have insurance policies are:
- Life Insurance
- Health/accident insurance
- Insurance for loans
The benefits of taking insurance are as follows:
- In case of your sudden demise or a crippling disease or accident that leaves you unable to earn, your family is secure and does not have to worry about their daily bread.
- In case of hospitalization for critical illnesses that normally cost a lot, the hospital bills are taken care of without causing a strain on your finances.
- In case you have purchased an asset (this is most applicable in the case of a home loan) make sure you shell out those extra bucks and take an insurance policy on it. Once again, in case you are not around to pay off your loan, the insurance company continues to pay off the loan to the bank and your family does not have to worry about keeping the roof over their heads.
In case of insurance policies, you should try and take as many till such time you are young. The older you get, the higher is the rate of premium you are required to pay.
Planning for Your Retirement
When you are young and in the prime of your career, you are so busy earning money and living life king size that it is easy to forget about the travails of old age. That is exactly why you need to start planning for your retirement from your youth.
- Long term options for investment are best suited for retirement.
- Investing in equity helps you build considerable wealth over the long term and you can reduce risks as well if you remain invested over the long term.
- You can also consider other options for investment such as pension plans, public provident fund and the National Pension Scheme.
If you intend to maintain the lifestyle you are leading now, post your retirement, you must take into consideration the inflation factor. You therefore need to invest in a manner that your retirement corpus grows at a higher rate than the inflation rate.
How to create the Financial Plan
Draw up an organized budget.
This is the first and the most important aspect of drawing up your financial plan. A detailed budget will serve the following purposes:
- It will list out all your expenses
- It will show you where you are overspending and can cut costs
- It will help you spend and save wisely
Cash flow planning
If you keep a hawk eye on what your current cash flow is like and can hazard an estimate about what your future cash flow is going to be like, you can not only deal with your expenses deftly, you can also stay liquid and deal with emergencies in case of any.
Managing your loan
This is the third and most important part of creating a financial plan. Managing a loan involves
- Allocating enough funds for EMI repayment each month
- Plan for large repayments when you have some extra cash in hand
In order to take care of tax planning, you need to compute your taxable income to get a hold on your cash flows. You can save on taxes effectively if you
- Use all the possible tax deductions that you are eligible for and invest in tax saving instruments that best suit your purpose.
- You must make such investments earlier in the financial year in order to get the full benefits.
- The numerous tax laws of the country may seem complicated, but having a basic understanding of them and tax saving instruments will help you save a large part of what you earn, and can be invested elsewhere for better returns.
Assessing and Reviewing your Financial Plan
Change, they say, is the only constant in life and thus your life goals will change as you grow older. Naturally then you cannot have one constant financial plan that you can rely on for the rest of your life. You must review your plan at regular intervals to see if your plan is meeting your financial goals. The three factors you should asses your plan on are:
- Has your risk appetite increased or decreased?
- Do you need to alter the allocation of your assets in your portfolio?
- Have your insurance needs altered?
Ideally you should review your financial plan once every six months or at least annually to see whether or not your financial plan is serving your financial goals.
Can you do your Own Financial Planning?
If you have read the above steps we have elucidated for you above, you know by now, that planning your finances is not really rocket science and can be done yourself. So if you are looking for a simple answer to whether or not you can do your own financial planning, the answer is yes. However, effective money management requires quite a bit of effort and mostly a lot of discipline.
Whether you need professional help in managing your money will depend upon the three important factors :
Do you have the Requisite Knowledge?
In order to adopt a "do it yourself" approach when it comes to handling your money, you need to have the financial wisdom to make an effective plan. For instance, are you aware of the inflation rate and how much or corpus do you need to have in order to lead a comfortable retired life? You also need to have the ability the track the markets and assess the merits of the entire gamut of investment and insurance products in order to see what are the products that are a perfect fit with your financial goals.
Do you have Sufficient Time?
Thanks to abundance of knowledge that is available all the time on print, internet and television acquiring the basic financial knowledge is not very difficult. The next and more important factor is do you have enough time to actively track your investments and see whether they need alternations. This may be required either when there is a major change in the macroeconomic environment thus making re-allocation necessary or when there are some changes in your life goals.
Can you afford it?
A professional financial planner may not be the cheapest option for you. However you need to make a judgement call and see whether it is worth spending your precious time and effort on money management that may not be your stronghold, or would you rather make an adjustment to your finances to pay the financial planner his fee and be at peace knowing that he will keep in touch with you to see whether your financial goals have altered and whether or not you need to make changes to your portfolio. Overall, there is no denying that the advice of an expert will help you see your money grow in a manner you may not have been able to manage yourself.
In conclusion it must be said that if you are wary of paying an expert a fee you should try and go ahead with your do it yourself approach and see if you can maximize the value of your portfolio. However if things are getting too complex for you too handle,you might as well hand things over to an expert.