While most of us know the importance of financial planning, many of us are still confused about how to achieve it. Financial goals differ from person to person and thus it is important to prioritize your financial goals based on your financial commitments and needs.
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There are two ways to go about it: firstly safeguarding your dependents from unforeseen circumstances like temporary unemployment or a medical emergency and secondly, building a corpus to meet your future goals like buying a house, children’s education or building retirement fund. Here is a step by step guide that will guide you to plan for both:
On many occasions, life takes unexpected turns and things don’t pan out according to our expectations. Therefore, it makes sense to have emergency funds to tackle exigencies so that you will be able to meet all your expenses and survive during such testing times.
Emergencies like hospitalization of a loved one, loss of a job, unexpected cash crunch in business or a hike in your child school or college fees can derail your financial plans and you may end up struggling to meet your day to day expenses.
Having a contingency fund gives you a sense of security and the confidence to overcome difficult situations. Here are the ways you can prioritize building emergency funds:
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Urgent financial emergencies can disrupt your financial plans but a hospitalization or the death of a loved one can cripple you emotionally as well. Once you have created an emergency fund, your next step would be to adequately insure self and family. If you are married with kids, then life insurance is essential protection you need to take to safeguard your dependents. Even if you don’t have kids you must consider availing an affordable term and health insurance.
Health insurance is meant to take care of your medical bills in case of emergency hospitalization. With health insurance, you do not have to delay or compromise on the medical care you need. A small monthly contribution towards your health plan will go a long way into giving protection in the future.
Term insurance is worth having as it looks after your family fiancés when you are not around. It provides security to your family and saves them from suffering financial problems when you are not around. It also helps you cover other risks such as disability due to accident and critical illness.
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Short term goals are the goals that you want to achieve within a few months or a year or two. It can include situations like a dream vacation, car down payment or pursuing a professional course, etc.
For fulfilling your short term goals you may consider investing in bank FDs or RDs. These investments can fetch you good returns at low investment risk. You may also consider investing in debt mutual funds that involve low to moderate risk and give returns at a rate of 7% to 9% on deposits.
These are the goals that take a slightly longer time to fulfill. You need to incorporate financial discipline and consider the long term benefits to remain focussed on these investments. You can incorporate your goals which can be realized within 3-5 years as medium-term goals. You need to accumulate the required corpus by using the available investment tools in the market. For mid-term goals, you may consider investing in ELSS, NSCs or 5-year FDs. Not only you get good returns but you can also increase your returns by saving taxes while investing in these options.
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Long-term goals comprise saving for your child’s education, creating a retirement kitty and buying a home. To achieve such goals, you need to remain invested for a long tenure and thus you can venture into various investment options available in the market. You may take advantage of the retirement planning options like PPF and NPS. For wealth creation, you may invest in equities and mutual funds. This way you can not only get inflation-beating returns as well as accumulate the required corpus for future commitments.
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