Financial planning helps achieve short, medium and long term financial goals. It considers your current financial behavior and variables to predict and design your future financial position, so that you achieve financial goals. Owning a house, living a peaceful retired life, educating your children in the best universities, buying a high-end car, going on an exotic holiday are all financial goals. However, just setting a goal is not enough. You need to plan for it in financial terms. This is when savings and investment come into the picture.
Irrespective of how much you earn, saving is inevitable. Ideally, you should save first and spend later. One way to ensure regular savings is to draw a budget. This will give you an idea on your financial position. It will also give a clear picture on how much you can afford to spend as opposed to how much you actually spend.
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Discipline and commitment is the key to having a good financial plan. Start early and let time earn you money. Also remember, regular savings are the best way to meet long-term goals. So, how do you go about it? Check out the following steps:
Assign goal timelines. This will give you a time-frame to work and achieve them. Say you are 30 years old and plan to retire at the age of 55. You will want to buy a car in 2 years time as your family size may increase from 2 to 3, with the birth of a child. You would then want to make a plan for their higher education, which is after 16 years. You would have to plan for your retirement.
All these goals require funds. Unless you are a millionaire, availing loans may be inevitable. You will have to arrange for the down-payment on the home or car, for which you will have to start saving money.
Clear goals and timelines give you a set direction. Based on this, you can determine your investment mix and risk taking capacity.
To buy a car worth Rs 10 Lakhs, you need to arrange 15% of the value of the car, i.e. Rs 1,50,000. To buy a house of Rs 50 Lakhs, you need to arrange for at least 20-25% of the value which is Rs 12.5 Lakhs. You have to focus on retirement planning and child education planning. Consider inflation and other macroeconomic changes while planning. Don’t forget to insure your life, assets and loans. Also, create an emergency fund.
Be clear on the reasons for saving. You may want to save for an emergency, a vacation or retirement. Once you know the quantum of savings, you will able to align your savings with goals.
Give standing instructions to the bank to automate payments like electricity bill, loans EMIs, and so on within a day or two of your salary. Ideally, savings should be 30% of your monthly salary. In the real World, saving even 10-15% is quite tough.
Ensure that bills are paid from your salary account. Transfer the rest of the money to a savings account. Schedule a weekly or monthly transfer of funds for expenses, based on the budgeted figure.
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Now that you have a clear picture of the funds required in the short, medium and long-term, plan your investments. Your investments should grow to the level that your monetary needs are fulfilled. To achieve this, design an investment mix which depends on your risk profile.
Investors are classified on their risk profile:
If you happen to save a little extra in a given month, put this money in a savings bank account.
To achieve short-term financial goals like taking a vacation or saving for emergencies, invest in liquid funds or short-term bonds. It is wise not to risk your capital or returns by investing in equity (highly volatile) and debt mutual funds (vulnerable to interest rate risks).
For medium-term monetary requirements like down-payment, invest in balanced funds. Balanced mutual funds are a combination of equity and debt and invest in a mix of stocks and bonds. Equity builds wealth over the long term. Debt gives high returns at low risk. You will also enjoy diversification benefits.
For long-term savings plan like retirement and child education, take the advantage of higher returns of equity. Remember, in the long-term, equity gives the best returns and multiplies wealth.
So, what is your action plan?
Equity is the best investment option to earn good returns and accumulate wealth over the long-term. Newbie investors aspiring to test the waters of stock markets can start by investing in liquid mutual funds and then switch to a systematic investment plan and transfer the investment to an equity fund.
SIPs are the best way to achieve long-term financial goals:
Any plan needs active monitoring. Check if the actual investment returns are in line with the expected returns. If some investments are underperforming, give them a fair amount of time. If they still don’t catch up, realize the investments and find alternatives. Keep an eye on the tax reforms and see if they impact your financial plan.
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