Financial planning is the method of setting, planning, achieving and periodically reviewing life’s goals through the appropriate management of your finances. A holistic financial plan not only includes investing money and building your wealth; but also correctly managing credit and your tax obligations, daily spending habits, planning for a family, setting up your home, saving for your children’s education fund, enjoying a better standard of living, saving for retirement as well as protecting yourself, your family with suitable insurance policies and organising your real estate. Every facet of a financial plan is interconnected. The following are a few basic tips that you need to keep in mind while planning your finances:
1. Plan your expenses
To avoid wasting money on unwanted things and eventually running out of money to buy your necessities way before your next pay cheque is due, prepare a budget. A budget merely lays out how much money you have coming in and how you want to spend it. Begin by separating the expenses into fixed and contingent costs, essential and non-urgent needs, essentials and extravagances, and avoidable and inevitable costs. Also refrain from overspending especially impulse buying by credit card. Before you decide to borrow money, make sure you can afford new debt repayments on top of your current expenses or commitments. This will help you to keep control of your expenses and even save some money over time.
2. Savings is the key
Deciding to save money is an important step toward effective money management. The earlier you start saving, the sooner you will allow yourself to benefit from compounding, a powerful mechanism that puts time to work on your savings. Savings will ensure that you never fall into an emergency where you don’t have any money at your disposal. It can even prevent you from falling into a debt trap. You will become wealthy by systematically investing monthly. Savings will also enable you to meet the financial objectives on schedule. Saving money is so easy. As soon as you receive your paycheck, begin categorising it under various headings; Expenses, EMIs, deposits, and savings, retirement savings are examples of these headings. Another good option is to try to save on tax by investing in ELSS mutual funds. Whatever approach you use to save money, just make sure that you always save at least 20% of your net income.
3. Keep a personal balance sheet
Knowing what you own and owe becomes easier by maintaining a personal balance sheet!. Have a list of your assets, including your bank account balance, all deposits, the value of your house, and the value of other assets and your liabilities, including auto loans, mortgage loans, credit card accounts, and other debt balances. Subtracting these two will give you your net worth. This personal balance sheet will help you pay off your debts in a timely manner and have a clear view of your financial position.
4. Insure everything that you own
You must accept the fact that your life and property are at risk. Hazards will result in a loss of revenue, placing you and your dependents in financial danger. Insurance is important for preserving wealth. A term insurance contract will provide you with higher risk coverage at a low cost and is paid in the event of the demise of the insured. You will also require health insurance. This insurance will make it possible for you to reap the benefits of high-quality healthcare at an affordable cost. Purchasing insurance for your home will also help protect the largest investment that you may potentially own. When purchasing insurance, compare plans online and find one that suits your expectations at a fair price.
5. Manage a portfolio of your investments
Building a portfolio entails spreading the money through different asset groups, such as equity, debt, real estate, gold and cash. It’s referred to as wealth distribution. This will require assessing the pros and cons of the various financial instruments available to you in the market. Depending on your short-term and long-term goals, the amount of risk you are willing to take, and the current and future market conditions, carefully divide your wealth to get a favourable return. You cannot totally avoid risks. But you can control your exposure to risks to an acceptable level. Make sure you understand exactly what you are investing in and recognise the potential risks. Take the trouble to learn about the mutual fund products you wish to invest in. Read prospectus, offer documents, annual reports and announcements very carefully. Pay close attention to the “risk factor” sections or “risk warning” messages. If in doubt, seek professional advice from your financial consultant or a mutual fund distributor. You can always contact us if you require any complementary guidance.
The information, analysis and opinions expressed herein are for educational purposes only and are not intended to provide specific advice or recommendations for types of mutual fund in India. This material is not an offer, solicitation or recommendation to purchase any financial products or services or Indian mutual funds. Always remember that all investments, including mutual fund investments carry some level of risk, including the potential loss of principal invested.