If you are reading this page–then Congratulations!
You already understand that Financial Planning can help you get your financial life in order. You want to take a planned approach to achieving financial success and not depend on chance alone.
But building a Financial Plan on your own self not only seem confusing but also it is a complex process which takes into account a number of pieces of your personal financial information – like assets, liabilities, cash flows, etc
Why do we need to Plan?
Let’s start at the very beginning
What is Financial Planning?
Financial Planning is a process whereby you will have a roadmap of your personal and financial life, which will help you to meet all your life’s expenses – both the expected… (household expenses, discretionary expenses, children’s school and college fees, putting money together to buy a home, EMI payments, saving and investing for your retirement and so on) and the unexpected…(medical contingency, creating a safety fund to compensate for loss of a job or for any other emergency).
It is easy to say that as long as you are earning, your monthly salary will cover your expenses, and whatever you save you will invest, and on your retirement ,hopefully, you will have enough set aside to live the rest of your life maintaining a good lifestyle.
But we all know that there are 2 things that go against this thought:
- Inflation– the one thing that kills the value of your money
Something that costs you`100 today, could cost you`110 tomorrow .
Imagine what it would cost you when you retire in so many years.
An example to bring out the point:
Monthly Household expense today: 30,000
Years to Retirement:15
Inflation Rate: 8% p.a.
Household expense at the time of retirement, to maintain the same lifestyle:
`95,165 per month
- The improper investment of your money
This is what can kill the potential future value of your money
For example, if you have surplus funds which you will not need for the next 5 year, and you choose to lock them into a 5 year FD to save on tax, consider that you might have been better off investing into the equity markets perhaps by way of a tax saving mutual fund – thereby getting the benefit of equity over the long term and also saving on tax.
It is the improper investment of your surplus funds that can reduce the power of your money to maximize your wealth.
Because of these 2 major factors, it is absolutely essential to have a strong Financial Plan that will give you awareness on where you stand today, and what steps you need to take to achieve your financial goals-Majorly creating Financial FREEDOM
Only Tax Planning is not Sufficient
We have also seen that there is a common misconception among investors today, wherein they believe that doing your tax-saving investments during the year is the same as doing financial planning.
These investors are mistaken.
Making tax-saving investments is often misconstrued as proper financial planning but financial planning is a lot more than this.
Financial Planning involves planning for your life goals such as your own retirement, your child’s education and marriage, purchase of an asset such as a house or a car, planning for annual family vacations and any other goals you may want to achieve
Financial Planning–The First Steps
Where do you stand today?
- The first step in doing any thing of importance Is to first assess where you stand today and where it is that you want to reach. To do this, you need to first measure your financial health, and then determine how your money MOVES
- Measuring your Financial Health
- When dealing with your personal finances, it is therefore important to start by knowing how financially healthy you are today.
- Generally most of us get a complete physical health check up once a year,especially after a certain age. This is done so that we know our health issues if any, and can treat any ailments before they cause any damage. Your finances are as important to you as your health, and deserve at least the same amount of care and attention.
- Here we will support you ,to see where you stand today-By Creating a wealth book on your current investment-which is created on the basis of current investment habits with which you live Bring all investment on Paper and How they are Performing –The cash flow they giving to you
Determining How Your Money Moves
- What are the financial habits, or lack of them, that have brought us to our current level of financial health?
- When you sit down to assess your self, You will know
- Broadly, we have four important financial quadrants, i.e. incomes, expenses, assets and liabilities.
- Money tends to flow between the above quadrants–your income will fund your expenses and will take care of the full or part purchase of any assets you may buy.
- Part purchase of assets can be supported by taking on liabilities.
- Your liability payments are in turn again funded by your income.
- Thus, the most important way to generate weal this to live with in or preferably below your means by keeping an eye on your money flow. For this, you need to first be aware of what your means are and what you are spending your money on
- The use of a personal budget is the simplest and quickest way of analyzing whether you are a spender, or a saver
- Be aware of your Net Monthly Income (post tax). This can be more than just your pay packet. You can be receiving income from rent, from interest, from dividends and soon.
- Make note of your Expenses. The main Expense items that show up in everybody’s budgets are: Grocery bill Spending on children’s school/college tuition fees Shopping and entertainment, including eating out Electricity bill Travelling / fuel expense Telephone and cell phone bills Medical expense Miscellaneous expenses such as society charges if you own a home and others Often, part of one’s cash out flow is for expenses and the other part is to fund existing liabilities. So we come to Step 3.
- Keep track of your Liabilities The main Liabilities that people can have are: Home Loan (the biggest and longest EMIs you will ever have to pay) Education Loan Car Loan Personal Loan Cash out flows that go towards repayment of existing liabilities such as home and car loans, are funding the respective asset purchases. For example, EMI payments are regular, and significant, out flows from your monthly income. Be aware of the rate of interest on each of your liability, whether you can available better rate else where, and know the tenure of your loan
- Invest your Net Free Cash to build your wealth
- The free cash you have left after your expenses are taken care of Is your net free cash. This is the money that will go towards building wealth for your financial goals and accumulating assets. And this Is the most important part of your money life.
- It is these ‘leftover’ funds, also known as your investible surplus that will build your wealth. So if you find your self in a situation where your investible surplus is low, or close tonil, you need to very quickly rectify the situation. The only way to do that is to cut back on unnecessary expenditures i.e .expenditure that is not on a necessity.
Remember–it Is better to first invest, and then spend out of what is left, rather than to first spend, and then invest out of what is left.
Where do You Want to Reach?
The first is that you need to set a target of where you want to reach in life–list out the things you want to achieve. You need to determine your financial goals.
The second should be that the more you are aware and knowledgeable of your finances, the better they will perform. Everybody would benefit from improving their financial literacy.
Let us address the first factor:
Determining Your Financial Goals-
We all live and strive for certain goals in life. Goals and objectives provide focus, purpose and vision to the financial planning process. By setting your financial goals you will be able to define your priorities, establish a direction and identify the results that you expect to achieve.
When listing down your financial goals, take care to make your goals measurable, realistic and time bound.
Identifying Your Financial Goals
Common financial goals can include:
- Purchase of home
- Purchase of Car
- Child’s Education
- Supporting your parents
- Child’s Marriage
- Retirement
- Vacation
- Buying Holiday Home
- Wealth Accumulation
- Creating Trusts
- Charity
Improving Personal Financial Literacy
- The ultimate goal of improving your personal financial literacy is to make smart money decisions and improve your financial well-being.
- Financial knowledge and awareness can help you take mature decisions on every topic of personal finance from your expenses, savings, budgeting to using plastic money wisely. Each of these decisions has an impact on your finances over all, and hence the ability to make good financial decisions is very important.
- Improving your personal financial literacy will not only enhance your financial freedom, but also over time provide financial security and stability
So how do you improve your personal financial literacy?
- Start by building up your financial awareness–you can read good personal finance websites, news letters and read the financial news papers
- Speak to your unbiased Financial Planner to give you an honest view on whether a particular financial decision is the right one to make or not.
- Every single informed decision you make will go towards making the most of your financial plan.
- TO BUILD YOUR WEALTH- BUILD YOUR KNOWLEDGE
- TO INCREASE YOUR KNOWLEDGE AND WEALTH SIGN ON OUR WEBSITE