We all do a little bit of planning to manage our income, our savings, our expenses, our future liabilities (the money we plan to spend in the future), whether or not we understand financial planning. While we can handle it well at the moment, it might not be the best way to do it or it might not give us the best results. While financial planning may seem technical, all it means is how to recognize your future income and liabilities today, list your current income and expenses, see if there is a gap between what you will need to know. the future and what you can do. current means, then plan your savings and investments to overcome this shortfall.
List of current income and expenses:
Start with your current income which should include your salary, the salary of other active family members, any other income like rent, business income, etc. Add it all up and don’t forget to also deduct the taxes you will pay on each income. to finally arrive at the net income of your family now.
After reaching your family’s net income, deduct any expenses such as household expenses for the year, tuition, EMI loans, or any other short-term liabilities (expected within the next 3-5 years ) that you are planning such as home renovation or medical treatment, etc. Show that deduction, what you get now are the savings you need to invest wisely for the future.
Set goals for future life
The next step in financial planning should be to deposit all your future financial liabilities, when they will arise, how much you will need, etc.
Objective 1: For example, if you are a 40 year old male and you expect your daughter’s college education to be expected after 8 more years and you expect it to cost around 30 lakhs, will you have the money? to finance it? Decide on an investment and how much you need to make today to reach that goal 8 years later.
Objective 2: Likewise, if you intend to retire at 60, you should say 1 lakh pm to maintain your current lifestyle which is 50,000 INR in present value. With advances in health care, you can easily expect a retirement life of 25 to 30 years. The money you need to live your life in retirement can be funded by a low-risk, long-term investment (like debt mutual funds, retirement plans) made today. Set aside some money for such an investment to be made today.
Objective 3: You can put some money aside to buy health insurance that you will need during your retirement phase or even earlier. The insurance premium must be funded from your current savings.
The goal setting process helps to understand your future needs, quantify them, and invest in the right asset class to fund each of the goals when they become due.
While asset allocation can be done with goal setting, it’s best to understand how asset allocation can impact the success of your financial plan. You can invest your savings in different asset classes like stocks, debt, gold, real estate, etc. Look at the investments you have already made as if you have a PPF or EPF account, the money you have invested in bank FDs, the home loans you are paying, etc. From the current savings and investments you have already made, calculate the percentage allocation to each asset class. For example, all bank FDs, PF amounts, government bonds, and debt-driven pension plans should be classified as debt. Any money invested in IPOs, company stocks, stock mutual funds should be classified as stocks, Lending EMIs should be classified as real estate, etc.
As a rule of thumb, 100 minus your current age should be allocated to stocks and stock-like products. If you are 40 years old, 60% of annual savings should be invested in equity-type products and the remainder in debt products. If your current investments don’t seem to reflect this, try balancing your investments by reducing the money you put in debt products like FDs and bonds and diverting that money to equity mutual funds or actions.
Most people are not comfortable investing in stocks because it requires special research, constant monitoring, and a lot of undue stress. Therefore, equity mutual funds are a better option since your money is professionally managed by fund managers who do all the research on companies before investing and continuously monitor the performance of the fund by buying good ones. stocks and selling underperforming stocks.
You need to start your financial planning early as this will give you the advantage of composing for example whatever option you choose to invest in your money will grow for a longer time with compound returns every year.
Annual review and rebalancing
While a solid financial plan is a good place to start, it’s very important that you follow it with discipline and rebalance your portfolio every year. Since life circumstances change frequently, you should review your plan with your financial advisor and make changes to reflect your new situation.
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