Financial Planning explained
What is Financial Planning?
Financial planning is a systematic approach to achieving one’s life objectives. A financial plan serves as a road map for the path of life. In essence, it enables you to maintain leverage of your revenue, expenditures, and savings, allowing you to manage your money and accomplish your goals. It means to plan your inflows and outflows to reach an objective or meet one’s expenses.
The right amount of money at the right time is essential to lead a peaceful life.
For instance, if you need Rs. 15 lakh to fund your Son college education after school, you must grow this amount before turning 18 and not when he reaches 17. This is the point at which financial planning becomes critical.
How can Financial planning benefit everyone?
Financial preparation has a plethora of practical advantages. It assists you in the following ways:
1. Be prepared for unexpected events.
Having a reserve fund in place is vital for financial planning. Here, you must ensure that your fund is sufficient to cover at least six months of your monthly salary. This way, you are not concerned with obtaining funds in a family emergency or work loss. The emergency fund will assist you in meeting a variety of costs on time.
2. Financial preparation in pursuit of life objectives
Personal financial planning is critical in India. It is not simply increasing your savings and decreasing your expenditures. Financial practice entails even more. This involves meeting your potential objectives, which could include the following:
3. Creating wealth
Due to the will cost of daily goods, if you wish to preserve or improve your existing standard of living in the future, you must accumulate an adequate corpus of capital. You might also want to upgrade your vehicle or build a new home in the future. All of this involves money, which emphasizes the critical nature of wealth creation. These objectives are attainable by prudently investing your capital in the appropriate avenues. Equity mutual funds can be an excellent long-term investment choice. These funds can assist the investor in accumulating wealth over time.
4. Education of a child
Education has become prohibitively costly, not only in India but globally. And this cost will continue to increase in the future. This is why it is crucial to begin preparing as soon as your child is born. Calculate the amount you plan to receive and start investing in long-term investment opportunities that will assist you in accomplishing this aim. You should consult a financial planner if you are unable to decide on where, to begin with.
5. To create a reserve fund.
The future is inherently unpredictable, and anything is possible at any moment. Consider the following example to illustrate this point.
Consider a father who took out an education loan to cover his daughter’s college education cost. Simultaneously, he is saving money for his upcoming retirement, which is a couple of years out. However, an unexpected medical emergency strikes the family. Regrettably, his lack of medical care means he must pay for medical costs out of pocket. This depletes his retirement fund and adds to his financial obligations.
Numerous people find themselves in similar conditions. And, though hoping for the best is admirable, it is crucial to prepare for the worst. A sudden job loss or an unanticipated medical emergency can wreak havoc on your finances. This is why you should have an emergency fund to cover certain expenses. Financial experts advise investors to hold a contingency fund equivalent to six months’ salary. This can be deposited in a liquid fund to ensure easy access to funds in the event of an emergency.
6. To treat your money in the most efficient manner possible.
It can be challenging to meet the needs of your family members. While your oldest child is preparing to enter college, your teenage son may wish to attend a space camp during the summer. Planning is essential in personal finance. It assists you in comprehending the needs of various family members and determining how to meet them. However, this requires prudent money management.
For instance, saving money in a bank account is preferable to spending it all. This is not, however, the optimal way to invest your capital. In contrast, alternative investments such as mutual funds can provide higher annual returns. Thus, when you recognize your family’s needs and put your money to work effectively to meet them, you may anticipate positive outcomes.
7. Planning for retirement
Your retirement could be 25 or 30 years out. However, this does not mean that you can prepare for it when you retire. To enjoy a peaceful and secure retirement, you must immediately begin constructing your safety net. Early planning will assist in securing the future against financial uncertainties. Additionally, you spend less if you start early and profit from the power of compounding, which lets you accumulate a sizable corpus over the 25-30 year cycle.
8. Boost your savings
Saving money without a financial plan will be possible. However, this may not be the most effective process. By developing a financial plan, you gain valuable insight into your revenue and expenditures. You can actively monitor and reduce your costs. This automatically increases your long-term savings.
9. Enjoy a High Standard of Living.
The majority of people believe that they must compromise their quality of living to resolve their monthly bills and EMI repayments. On the opposite, you won’t have to give up your current lifestyle with a sound financial strategy. It is possible to accomplish your objectives while maintaining a certain level of comfort.
10. Attain tranquility
With sufficient funds on hand, you can comfortably cover your monthly expenses, save for plans, and splurge on yourself and your mates. Financial planning enables you to handle your finances effectively and with confidence. Do not be concerned if you have not yet arrived at this point. If you are in the direction of financial planning, financial stability is not far away.
11. To accumulate a retirement fund.
People are now enjoying longer retirement lives as a result of newer drugs and significant medical advancements. This is unquestionably a positive development. You can spend some more time with your loved ones, pursue your interests and ambitions, and travel the world. However, you must address one critical question: how will I finance all of these expenses? You must have a sufficient financial cushion to ensure that you enjoy your retirement years to the fullest. This is possible if you have a financial plan in place that offers a steady stream of income after retirement.
12. Tax savings
Per year, you probably pay a sizable amount of tax. However, you can now legally reduce your tax liability. The Indian Income Tax Act contains numerous provisions that allow individuals to minimize their tax liability. By planning for taxes, you can find the best investments for your money and minimize your taxable income. Mutual funds are a tax-efficient way to save for your long-term objectives.
How do you build a financially efficient plan?
1. Consider the various investment opportunities.
Investors have a plethora of investment opportunities. There are approximately 2,000 mutual fund schemes available. Diverse investment strategies allow investors to accomplish a variety of objectives. For instance, equity funds are well-suited for long-term goals such as retirement planning, child education, and so on. If you’re looking for a reasonably stable income stream and are risk-averse, you might consider investing in debt mutual funds. Equity Linked Savings Schemes (ELSS funds) are advantageous for tax savings. Numerous financial analysts have emphasized the importance of mutual funds when investing—consistently investing in these funds over time.
2. Create a list of your financial objectives
Consider the following: ‘What are the various financial goals I wish to accomplish in my life?’ Create a list of them on a sheet of paper. Do not be afraid to set any target, as no goal is too small or too big. However, ensure that the objectives are precise. For instance, the following are some attainable objectives: ‘I wish to purchase an SUV worth Rs. 13 lakh within the next 18 months or ‘I want to buy an apartment worth Rs. 80 lakh within the next five years.
3. Recognize the present financial circumstances
Assess your current financial situation, including your wages, expenditures, debt, assets, and investments. This is the first step in financial planning because it provides you with an accurate picture of the state of your finances and opportunities for improvement.