All of us perform some bit of likely to manage our income, savings, expenses, future liabilities (money we anticipate to spend down the road) whether we understand anything about financial planning you aren’t. While we might be managing it for now, it will not be the best service or it might not give us ideal results. While financial planning might sound technical, all it indicates is how does one recognize your future earnings and liabilities today, take note of your current earnings and expenses, check if there is shortfall between whatever you’ll need later on and what things can get to with current means then plan your savings and investments to conquer that shortfall.
List Current Income & Expenses:
Start with your existing income that ought to include your salary, salary of other working members in the household, some other income like rent, business income etc. Add all this up please remember to also deduct the taxes you’ll pay on all of the income to finally reach the net income on your family at this time.
After having arrive at your family’s post tax profit, deduct all expenses like household expenses to the year, tuition fees, loan EMIs or some other short-term liabilities (expected within next 3-5yrs) you foresee like renovating the home or a medical therapy etc. Post this deduction everything you now get could be the savings you’ve that you will need to invest wisely for that future.
Setting Future Life Goals
The second step in financial planning needs to be putting down your entire future financial liabilities, enough time when they will arise, the sum you will need etc.
Goal 1: For instance, a high level 40 yr old man and expect your daughter’s college degree to be due after another 8 yrs and anticipate this will likely cost around 30 lakhs then, will you’ve got the money to fund it? Decide on a wise investment and the amount you will want to make right now to achieve this goal 8 yrs later.
Goal 2: Similarly, if you are hoping to retire at 60 yrs, you would like say 1 lakh p.m to maintain your overall lifestyle which can be INR 50,000 in the current value. Given the advances in healthcare, you can certainly expect a 25-30 year long retired life. The money you may need to live your retired life may be funded by way of a long-term low risk investment (like debt mutual funds, pension plans) made today. Set aside some funds for this kind of investment to become made today.
Goal 3: You may reserved money for purchasing some medical health insurance that you will need during your retired phase and even earlier. The insurance premium needs being funded from your savings.
The goal setting tools process helps with understanding your future requirements, quantifying them and making investments from the right asset class to fund all of the goals whenever they become due.
While asset allocation could be done along with goal setting tools, it is far better to understand how asset allocation could affect the success of your financial plan. You can invest your savings in numerous asset classes like equity, debt, gold, property etc. Look at the investments you’ve already made like in case you own a PPF or EPF account, money you’ve got invested in bank FDs, mortgages you are paying etc. From the current savings and investments, you might have already made, calculate the share of allocation meant to each asset class. For instance, all bank FDs, PF amounts, govt bonds, debt-oriented pension plans ought to be classified as debt. Any money purchased IPOs, company stocks, equity mutual funds needs to be classified as equity, loan EMIs must be classified as real estate investment etc.
As a thumb rule, 100 minus your present age ought to be allocated to equities and equity like product. If you might be 40 yrs old, 60% of annual savings needs to be invested in equity like products along with the balance with debt products. If your overall investments are not appearing to reflect this, try balancing your investment funds by reducing the amount of money you put indebted products like FDs and bonds and divert that cash towards equity mutual funds or stocks.
Most everyone is not comfortable paying for stocks because it requires special research, constant monitoring and much of undue stress. Hence equity mutual money is a better option as your money is professionally managed by fund managers that do all the research on companies before investing and continuously monitor the performance in the fund by collecting good stocks and selling underperforming stocks.
You has to start your financial planning early as this will give you the main advantage of compounding example whichever option where you will invest in, your dollars will be able to grow for a longer time duration with returns compounded each year.
Annual Review & Rebalancing
While an audio financial plan is an effective starting point, following it with discipline and rebalancing your portfolio annually is very important. Since life circumstances change frequently, you need to relook for your plan along with the financial advisor and produce changes to reflect your circumstances.