Devising a smart and balanced financial plan for your immediate and long-term goals during different stages of life is not always easy and straightforward. A one-size-fits-all approach doesn’t really work in financial planning. There are so many questions that you may not have answers to at present. Yet, you have to account for these aspects while you are planning today, so that you can make a fair assessment of your future needs, lifestyle requirements, financial obligations and life’s major milestones. There are also different types of financial planning which you can explore, however we’ll reserve that topic for another blog. Let’s first understand the most crucial steps involved in designing a sound financial plan.
1) Setting your financial goals with clarity
Myth #1: Only wealthy people need to have a financial plan.
Myth #2: Only finance professionals need to know about financial planning.
Both these statements are fundamentally incorrect. They are not even stating clearly as to why a financial plan is important for one and all. Each one of us has varied and unique financial goal ideas. A young working professional’s financial plan cannot be exactly the same as a new parent’s. If you are a middle-aged entrepreneur, your financial commitments are going to be entirely different from those of a person in their near-retirement age. Your current financial decisions have a huge impact on your dreams and your family’s future.
Based on your life stage, standard of living, risk appetite and financial responsibilities towards your loved ones, the first step in developing your financial plan is to set the goal. In other words, determining your destination in this financial journey. This gives you the much-needed direction and makes you feel more prepared as you cross each financial milestone on your way towards hitting the target. The idea here is to identify your short-term, medium-term and long-term goals.
You may wonder - ‘What is a financial goal?’ From buying a bike or a car, creating an emergency fund, going on a vacation to funding your or your child’s higher education, preparing for your wedding, buying a house and planning for your retirement, every such milestone deserves a mention in your list of financial goal ideas. For instance, let’s assume you are 28 years old today and want to buy a house when you turn 35. Suppose you estimate that the property will cost Rs. 60 lakh in 7 years, and the prices will grow at 6% annually, you may actually need around Rs. 90 lakh then. This financial preparedness helps you understand how much savings and investments shall be required to be able to afford the house in future.
2) Budgeting first and then sticking to it.
If goal setting is at the heart of a smart financial plan, then budgeting can be considered as its backbone. Keep tracking your everyday expenses to know where to cut down, how to save and how much to invest for better returns. A good rule of thumb for beginners: Reserve 50% of your income consistently for essential expenditures like rent, food, bills etc., 30% for lifestyle needs such as shopping, entertainment and dining and the remaining 20% goes into savings and investment buckets.
3) Emergency fund
The importance of financial planning isn’t strongly felt until uncertainties and contingencies come knocking at your door. So, according to you, how much should your emergency fund be? If your monthly household expenses are Rs. 50,000, then ideally your emergency fund should be around Rs. 3 lakh i.e. equal to at least 6 months of your monthly expenses. For quick access during urgent situations, you must also remember to keep this money in a liquid fund or savings account. Refrain from making any use of this fund recklessly.
Also Read:Are you financially prepared to deal with any critical illness?
4) Insurance coverage + Diversified investments + Debt management
You cannot simply brush aside these three pillars of your financial plan i.e. a term insurance policy, health insurance cover, and a child insurance plan. These policies accompanied by the right set of add-on riders provide comprehensive protection to you and your families especially during life’s uncertain times, in turn ensuring that your financial journey isn’t derailed come what may.
It is extremely important to note that putting all your money, time and efforts into just one investment option carries a lot of risk and even brings down your returns potential. Instead, finance experts recommend diversifying your portfolio by investing in different instruments which can be further tailored for your unique needs. After all, don’t put all your eggs in one basket.
What is investment planning then? Suppose your monthly investment is Rs. 10,000. Instead of putting it all into just one product, you can split it up smartly as Rs. 5,000 for mutual funds (long-term wealth creation), Rs. 2,000 into PPF (guaranteed returns), Rs. 2,000 into National Pension Scheme (financial planning for retirement safety net), and Rs. 1,000 towards a Unit-Linked Insurance Plan - ULIP (investment + insurance = dual advantage).
Debt is not a bad move after all. Not managing your debt surely is. The importance of financial planning lies in realising this fact about your loans. High-interest debt like credit card bills, missed EMI payments, recurring penalties, frequent personal loans, and an above 40% debt-to-income ratio are all signs of your failing financial health.
5) Revisiting, reviewing, and regularizing your portfolio.
If you think financial planning is done only once at the start, after which you are sorted for life, then you have got it absolutely wrong. Financial planning is a recurring activity, needing constant monitoring and managing to maximize returns and minimize risks. So, keep going back to your dashboards every 3-6 months to check how your investments are performing. Because, over time, your goals evolve, your responsibilities increase, and your dreams change. Your financial plan should therefore adjust and adapt itself to the life events as and when they occur and not stay stagnant.
6) Tax planning
Consult a tax expert to understand how you can save tax efficiently. Learning to reduce your tax liability is extremely important to save alongside as you earn, save while you invest and save when you build wealth. From deductions for premiums, to tax-free maturity amounts, make a list of the tax benefits your financial instruments can deliver to minimize your tax. For instance, consider ELSS, PPF, NPS, ULIPs, and life insurance for Section 80C deductions. To avail tax savings on insurance, use Section 80D for health insurance premiums.
Also Read: How To Ensure That Your Tax-Saving Investment Does Much More Than Save Tax
The bottom line: When you start early, even smaller contributions - with the power of compounding over the years - can grow potentially into a huge wealth cushion. That is, if you invest Rs. 5,000 monthly at age 25 in a fund earning 10% annually, by age 60, you can have around Rs. 1.9 crore. However, if you start at only 35, the same investment may only grow to become Rs. 66 lakh, thus yielding a much lesser corpus for your major milestones in life.
Financial planning isn’t about money alone. In fact, it has multiple components to it: cultivating habits to spend prudently, learning about techniques and tools to save regularly, developing the abilities and skills required to increase earnings, and refurbishing the portfolio to grow wealth consistently for different stages of life.
Still wondering what types of financial planning to consider? Do you think you can design a great financial plan using complex formulas? Or complicated trackers maybe? Or some difficult calculations? Or even certain tough financial decisions to begin with? Well, the answer is - none of the above! A smart and sound financial plan is a combination of protection for life + emergency reserve + goal realignment + risk diversification + long-term value creation.
Contact us today to build your customized financial plan and take the first step towards securing your future.
