Newspapers, magazines, television channels and just about every one under the sun seem to be talking about the importance of financial planning. So what is financial planning; more importantly, does it merit the attention that it is being given?
Planning is one of the greatest characteristics of human beings. When it comes to money, planning needs to be concrete as there are enough variables that can affect your financial planning. As Allen Lakein says ‘Failing to plan is planning to fail’
Financial planning is a process through which an individual can chart a roadmap to meet expected and unforeseen needs in life.
Fulfilling the future needs and improving the standard of living depends on the plans you make today. A comprehensive financial plan as one that covers savings and investments; planning for retirement, education, emergencies, major purchases, and other financial goals; and insurance needs. But few people have plans in place to cover even a part of their finances.
Myth : Financial planning is not for me
Whether you have a lot of money or very little money, you need to manage your finances. You need to give time for your investment to grow. Say for example you want to learn swimming. You will pay for swimming instructor, buy swimsuit and spend time practising in the swimming pool. Similarly you need to spend time understanding your money management and financial planning. It allows you to systematically meet your financial goals.
Here are few tips to strengthen your finances.
1. Set realistic goals
All of us have goals, be it riding high in career, buying a house/car or providing good education to children. Each of these is important. But many times we set goals on the basis of peer pressure or high aspirations. These do not reflect our financials and, as a result, some of the important goals become unachievable, creating a huge disappointment for us. So, it’s important to ensure that you set goals that are measurable in monetary terms and achievable within your resources.
2. Plan monthly budgets
Why not plan your monthly budget on a regular basis when it is a daily routine of your life? Many of us do not plan for it because of which we come into the category of spendthrifts where your expenses exceed your savings and therefore, you are not able to plan for a financial goal. Knowing what you earned and where your money went makes you aware about your financial situation. Most of the times, when your expenses are high, a large part is accounted for by things such as entertainment and eating out, which are difficult to track. Keeping a check on expenses has two benefits. First, you can know the excess outgo, and, second, you can analyse the spending habits of your family members. By creating a budget, you can limit each expense so that you do not live beyond your means. Also, if the budget is going out of control, this will help you know where to take corrective action.
3. Maintain an emergency fund
Your finances are worst-hit when you fall ill or lose your job. If you do not have funds for such emergencies, you may have to tap into savings you may have kept for your life goals. For a salaried person, this may mean starting saving from the scratch. Also, most of us have loans to pay, and any emergency can lead to default. This can jeopardise the credit history as well. Hence, it’s necessary to have an emergency fund. Ideally, you should be able to meet about four-six months’ expenses in case of an emergency. If you have been falling short on this account, calculate how much your ideal emergency fund should have and start saving from this month to reach the required level.
4. Reduce your debts
It’s not surprising that most of us go into heavy debt as we reach the middle of our career. Easy availability of finance brings with it a temptation to enhance our lifestyle with every rise in the pay check. But many times we go overboard when we start piling debt in anticipation that the rise in future income will help us repay the loans. The dependency is so much that almost 50% of our earnings go into paying our liabilities. This lowers our contribution for life goals. Avoid such temptations and do not overburden yourself with debt. Housing loan is a good debt, as it helps you create an asset, while credit card debt may land you in trouble because of the high interest cost. Ideally, if you raise debt, keep the EMIs within 25-30% of your net income so that you can manage your cash flow comfortably. If your debt was high last year, make a strategy to lower it.
5. Focus on wealth creation
It is better to start planning today rather than buy things at the last moment and then keep paying the interest for the next 7 to 10 years or more. Let us understand this with the help of an example. Mr. A has just started his job in a multinational company and decided to buy a Rs 1 crore home for himself after 20 years. He started his investment in mutual fund schemes (assuming return at 15%). He needs to start saving Rs 6500 per month to achieve his desired goal in the next 20 years. Therefore, by investing only Rs.15.85 lakh approximately, he will be able to achieve his goal. This means that if you have started planning to buy a house today, you will probably get it at the end of 20th years at a lower cost than what you will actually pay for it.
6. Plan debt-free trips
If you have planned properly for your future goals like going on a vacation, you need not have to use your credit card or take a loan, which eventually increases your liability. In fact, prior savings will help you in growing your financial assets so that you could easily afford to go out for a vacation without opting for a debt and paying long-term EMIs. Small trips can be planned every year if financial matters are planned properly.
Whether it is equities, debt, real estate or gold, investing is the key to a stable future. But most of the time we forget this by linking investments with returns. This leads to mistakes such as over investing in a single asset or taking risk beyond our capacity. Ensure that you invest for your goals and follow an asset allocation strategy which is within your risk tolerance zone. If you are advised to allocate more for an investment that is above your risk tolerance level, understand its risk-return characteristics before going ahead.
Financial planning not only helps in building wealth, but also helps in securing your finances. You don’t need a particular educational background or fancy degrees to be able to manage your finances well. Do your research, stay aware of changing trends and consult a financial planner , he will be able to help you navigate through different financial products. If you follow the tips mentioned in this article to manage your finances, you can find stability and prosperity. So, get started now to secure your future financial wellbeing.