Financial planning helps you achieve short, medium and long-term financial goals. It considers your current financial behaviour and variables to predict and design your future financial position so that you achieve your financial goals.
To be financially successful, setting financial goals is of utmost importance. Financial goals can be of three types: short-term, medium-term and long-term. We will be discussing how to create and manage a long-term financial plan so as to achieve long-term financial goals.
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We all have dreams and goals like buying a home, living a peaceful retired life, educating your children in the best universities, buying a high-end car, going on an exotic holiday and so on. But your dreams will remain just that if you do not have the money to make them come true. So, setting a goal alone is not enough, you need to plan for it in financial terms.
This is when savings and investments come into the picture. Creating and managing a long-term financial plan has 5 steps:
Goals are just dreams if you do not work towards them. To work towards them, you will need to assign timelines. This will give you a time frame to work and achieve them. For instance, say you are 30 years old and plan to retire at the age of 55. You want to buy a car in 2 years as your family size has increased from 2 to 3, with the birth of your new child.
Your child is 1 year old and you want to plan her higher education, which is after 16 years. You also want to buy a house in 3 years. Unless you are a millionaire, you will have to buy a house and cars by availing loans. You will have to arrange for the down-payment for which you have to start saving money.
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Once you jot down your goals and timelines, you will have a clear picture on how to achieve your goals. This will determine your investment mix and also your risk taking capacity.
Now that you have set your goals, it is time to assign monetary values to them. If you want to buy a car worth Rs 7 Lakhs, you need to arrange 15% of the value, i.e. Rs 1,05,000 for the down payment. Also, if you plan to buy a house of Rs 50 Lakhs, you need to arrange around Rs 10,00,000 for the down payment. You also need retirement and child education plans. Such planning should be done considering inflation and other macroeconomic changes. You will also need to provide for emergencies by insuring your life, assets and loans.
Now that you know the amount of money that you require in the short, medium and long-term, you will have to plan your investments. Your investments should grow to the level that your monetary needs are fulfilled. To achieve this, you have to work on deciding your investment mix, which depends on your risk profile. For short-term financial requirements like down-payment, it is best to invest in liquid funds or short-term debt funds. You cannot risk your capital or go for unpredictable returns by investing in equity which is highly volatile. For medium-term monetary requirements, you can invest in debt funds. For long-term targets like retirement and child education, you can take the advantage of the higher returns of equity (Equity is a great long-term investment). Remember, in the long-term, equity gives very high returns and multiplies wealth.
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Now that you have each aspect of your plan ready, you will need to act upon it. So, what is your action plan? SIPs are the best means to achieve your long-term financial goals. Why so, you may ask?
Planning is not a one-time job. You will have to actively monitor and review plans regularly. Check if the actual investment returns are in line with the expected returns. If your investments are underperforming, do not rush and realize them. Give them a fair amount of time. If they still don’t catch up, liquidate and find alternatives. Keep an eye on the tax reforms. If any changes in the tax provisions are made, see if they impact your financial plan.
Discipline and commitment are the keys to having a good financial plan. Start early and let time earn you money.
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