We all do a little bit of planning to manage our income, savings, expenses, future liabilities (money we expect to spend in the future), whether we understand anything about financial planning or not. While we may be handling it just fine for now, it may not be the best way to do it or give us the best results. While financial planning may sound technical, all it means is how do you recognize your future earnings and liabilities today, list your current earnings and expenses, see if there is a gap between what you will need in the future and what you can do with current means and then plan your savings and investments to overcome that shortfall.
List current income and expenses:
Start with your current income, which should include your salary, the salary of other working family members, any other income such as rent, business income, etc. Add it all up and remember to also deduct the taxes you’ll pay on each income to finally arrive at your family’s net income today.
After you have arrived at your family’s net income, deduct all expenses such as household expenses for the year, tuition fees, EMI loans, or any other short-term liabilities (expected within the next 3-5 years) you anticipate, such as home renovation or medical treatment, etc. . Post this deduction, what you get now is the savings you have that you need to invest wisely for the future.
Set future life goals
The next step in financial planning should be to write down all of your future financial obligations, when they will arise, how much you will need, etc.
goal 1: For example, if you are a 40 year old man and you expect your daughter’s college education to expire after another 8 years and you anticipate that this may cost around 30 lakhs, will you have the money to fund it? Decide on an investment and the amount you need to make today to achieve this goal 8 years later.
Goal 2: Similarly, if you intend to retire at 60, you need to say 1 lakh pm to maintain your current lifestyle, which is INR 50,000 in today’s value. Given the advances in health care, you can easily look forward to a retired life of 25 to 30 years. The money you need to live your retirement life can be financed through a low-risk, long-term investment (such as debt mutual funds, pension plans) made today. Reserve some money for such an investment to be made today.
Goal 3: You can set aside money to buy some health insurance you’ll need in retirement or even sooner. The insurance premium must be financed from your current savings.
The goal-setting process helps you understand your future requirements, quantify them, and make investments in the right asset class to fund each goal when it’s due.
While asset allocation can be done in conjunction with goal setting, it’s best to understand how asset allocation can affect the success of your financial plan. You can invest your savings in various asset classes like stocks, debt, gold, real estate, etc. Look at the investments you’ve already made, such as whether you own a PPF or EPF account, money you’ve invested in bank FDs, home loans you’re paying off, etc. From the current savings and investments you’ve already made, calculate the percentage allocation made to each asset class. For example, all bank FDs, PF amounts, government bonds, debt-oriented pension plans should be classified as debt. Any money invested in IPOs, company shares, equity mutual funds should be classified as equity, loan EMIs should be classified as real estate, etc.
As a general rule of thumb, 100 minus your current age should be assigned to stocks and stock-like products. If you are 40 years old, 60% of annual savings should be invested in equity-like products and the rest in debt products. If your current investments don’t seem to reflect this, try balancing your investments by reducing the money you put into debt products like FDs and bonds and diverting that money into equity mutual funds or stocks.
Most people are not comfortable investing in stocks as it requires special research, constant monitoring and a lot of undue stress. Therefore, equity mutual funds are a better option, as your money is professionally managed by fund managers who do all the research on companies before investing and continually monitor the performance of the fund by buying good stocks. and the sale of underperforming stocks.
You need to start your financial planning early because this will give you the advantage of compounding example whichever option you choose to invest in, your money will grow longer with returns compounding each year.
Annual review and rebalancing
While a solid financial plan is a good starting point, it’s very important to follow it with discipline and rebalance your portfolio every year. Because life’s circumstances change frequently, you should review your plan with your financial advisor and make changes to reflect your new circumstances.