PERSONAL FINANCE SOFTWARE
What is Financial Planning?
Financial Planning is an ongoing process to help you make sensible decisions about money that can help you achieve your goals in life; it’s not just about buying products like a pension or an ISA.
It might involve putting appropriate wills in place to protect your family, thinking about how your family will manage without your income should you fall ill or die prematurely, spending money differently, but it involves thinking about all of these things together i.e. your ‘plan’. You can build a plan on your own, or if your needs are more complex you might want the help of a Financial Planner.
Create a sound financial plan in six steps
Establish your goals in life – short, medium and long term
Work out what assets and liabilities you have – write them down
Evaluate your current financial position – how close are you to achieving your goals?
Develop your plan – create a “route map” for achieving your different goals
Implement your plan – make the changes and make it happen
Monitor and review your plan at least yearly and make adjustments when needed
Start by working out your goals in life, in the short, medium and long term. Prioritise them, and think about the likely cost of those goals and when you will need the money, so you can start to plan your finances to work out how to achieve them. Don’t forget you also have to plan for some of the hurdles you may have to overcome too. It’s about getting organised; being in control of your finances rather than letting your finances control you.
By planning your finances to meet your goals you will:
Have a much greater confidence of where you are going in life
Reduce your stress levels and start to enjoy life more
Gain control and peace of mind through knowing whether you’re on track for the future you want for you and your family
5 golden rules of financial planning
These financial tenets shall never change or become irrelevant. Follow them if you want to protect your finances against uncertainty.
Have a plan, be rich
This is, perhaps, one virtue that can neutralise the impact of various financial sins. A plan acts as a guide through your financial journey and, even if domestic and global upheavals dent your investments, it will help you get back on track. At the macro level, planning affects every aspect of personal finance, be it taxation, insurance or achievement of goals.
It can cut losses, enhance gains, and avoid the pain and panic of a financial or lifestage crisis. At another level, a plan is a simple matter of listing out your needs and wants, and deploying the money in right avenues so that you have it when you need it. As a first step, calculate your existing worth and identify the goals for which you will require money in the future. Calculate the exact amount required for each goal after factoring in inflation and the time horizon in which you want it.
Find out your risk-taking ability and then pick the instruments you want to invest in (asset allocation). Link your investments to goals and you won’t have to scrounge around for money when you need it. Build a plan the minute you are employed because you can invest without straining your finances and without the burden of responsibilities.
More importantly, it will help you gain from the power of compounding. So if you wake up to the need of a retirement kitty at 40, you’re likely to save much less than if you started at 25 (see graphic). It is likely that your planning will go for a toss in a market collapse like that of 2008, but will typically stand you in good stead through most ups and downs.
Secure your family & finances
Most people are so intent on investing and building assets that they forget to cover their risks. Since it’s crucial to secure your family and finances by creating an adequate insurance portfolio, this is the second constant that does not change with time. A majority of the people buy insurance to save tax and as an investment, with life insurance the second most favoured investment destination after fixed deposits, accounting for 25% of the wealth of small investors.
The amount of cover you take, be it life or health will depend on your lifestage, income, dependants and requirements. Next, consider insurance policies that can help you reach your goals. These include traditional (endowment) and child plans, and finally, buy plans that can assist you in creating wealth (Ulips). The other important insurance plans that you shouold buy are those that cover real estate and household content. These are quite inexpensive, with the essential covers costing you less than Rs 2,000 a year.
Never ignore taxes
Much like death, taxes will never go away. While rules and slabs may change from time to time, taxation itself won’t. In fact, it affects every aspect of your finances, from income and allowances to investments as well as the assets you buy or sell. So, stop ignoring or pushing it away.