We all plan a little to manage our income, savings, expenses, future obligations (money we expect to spend in the future), regardless of whether we understand anything about financial planning or not. As long as we can manage this well, maybe it’s not the best way to do it, or not the best results. While financial planning may sound technical, it all means how you recognize your future income and liabilities today, list current income and expenses, see if there is a gap between what you will need in the future and what you can get current funds with. and then plan your savings and investments to overcome this shortcoming.
List of 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 everything and be sure to also deduct the taxes you will pay from every income to finally come to your family’s net income now.
Once your family’s net income is received, deduct all expenses such as home expenses for the year, tuition fees, loan loans or any other short-term liabilities (expected over the next 3-5 years) that you envisage as home renovations or treatment etc. Post this deduction. The savings you get now are your savings that you need to invest wisely in the future.
Setting future life goals
The next step in financial planning should be to drop all your future financial obligations, the time when they will arise, the amount you will need, etc.
Goal 1A: For example, if you are 40 years old and you expect your daughter’s education to end in another 8 years and you estimate it could cost about 30 nail polishes, will you have the money to fund it? Decide on the investment and the amount you need to make today to achieve this goal, in 8 years.
Goal 2: Similarly, if you are going to retire at age 60, you need to say 1 nail polish per night to maintain your current lifestyle, which today is INR 50,000. Given the advances in health care, you can easily expect a life of retirement of 25 to 30 years. The money needed to live in retirement can be financed through long-term low-risk investments (such as loan mutual funds, retirement plans) made today. Set aside some money for such investments that need to be made today.
Goal 3A: You can allocate money to buy health insurance that you will need in retirement or even earlier. The insurance premium should be funded from your current savings.
The goal setting process helps to understand your future requirements, determine their number and make investments in the right asset class to fund each of the goals when they come up.
Although asset allocation can be accomplished along with goal setting, it is better to understand how asset allocation can affect the success of your financial plan. You can invest your savings in different asset classes such as equity, debt, gold, real estate, etc. Look at those investments you have already made, for example if you have an account in PPF or EPF, money that you have invested in bank deposits, home loans. payment, etc. From the current savings and investments you have already made, calculate the percentage of the distribution of funds for each asset class. For example, all bank deposits, amounts of government funding, government bonds, debt-oriented pension plans should be classified as debts. Any money invested in IPOs, company stocks, mutual funds should be classified as equity, EMI loans – as real estate, etc.
Generally, 100 minus your current age should be allocated to the stock and share-like product. If you are 40 years old, 60% of your annual savings need to be invested in product-like capital and on the balance in borrowed funds. If your current investments don’t seem to reflect this, try to balance your investments by reducing the money you invest in debt products such as software and bonds, and direct that money to mutual funds or stocks.
Most people are uncomfortable investing in stocks because they need special research, constant monitoring and a lot of unwarranted stress. Therefore, mutual funds are the best option because your money is professionally managed by fund managers who conduct all company research before investing and constantly monitor the fund’s activities by buying good shares and selling underperforming shares.
You need to start your financial planning early because it will give you the advantage of drawing up an example, whichever option you choose to invest, your money will grow over a longer period of time with profits made up each year.
Annual review and rebalancing
While a sound financial plan is a good starting point, it is important to follow it with discipline and rebuild your portfolio annually. Because life circumstances change frequently, you should review your plan with your financial advisor and make changes to reflect new circumstances.