Adequate income, manageable expenses, regular savings and investment, good returns from investment, adequate health and life insurance cover and sufficient income after retirement are the essential ingredients for financial security. Unfortunately, most people, particularly in developing economies, do not have these attributes. The villain here is lack of financial planning. As the saying goes, “failing to plan is planning to fail.”
Every household receives income. Routine expenditure is met out of this income. But this is not sufficient; future expenses also have to be provided for. That is why savings and investment become important. Financial planning is planning finances for optimum results. Financial planning involves the processes of streamlining of income and expenses, savings and investment and assets and liabilities. It involves identifying financial goals and formulating and implementing an action plan to realise those goals. Financial planning is necessary to ensure that households have enough resources to fund present and future needs.
Broadly, the important areas of financial planning are the following:
1. Personal financial planning
Finances have to be planned in such a way that income and expenditure are matched. It is important that each family should live within its means. Living beyond one’s income would lead to debt trap and financial ruin.
2. Debt counseling
There is nothing wrong in borrowing. In fact, right kind of borrowing can be a smart idea. For instance, borrowing to buy a house helps not only in owning your dream home, but also in tax planning.But it is important to plan ‘how much and when to borrow.’
3. Insurance planning
Insurance planning involves providing for adequate health and life insurance. In this age
of increasing life expectancy, health insurance is hugely important. Similarly the
breakdown of joint family system has rendered life insurance crucial. Life insurance need
not be treated as investment. A low premium- high cover term insurance is the best.
4. Investment planning
Investment planning can make a huge difference to a person’s financial condition. Early and regular investment in the appropriate asset classes can ensure financial security.
The essentials of investment planning can be summarized as follows:
1. Set your financial goals
Normally, people have goals such as acquiring a house, buying things like vehicles, marriage, supporting family, children’s education/marriage, retirement planning and finally bequeathing one’s wealth.
2. Decide on the time frame to achieve these goals
It is important to decide the time frame for achieving different goals. For example: when to acquire a house, when to buy a car, when to fund the education of children etc.
3. Assess your risk appetite
The ability of a person to take risk is important. Risk appetite depends on several factors like age, income level, expenditure commitments etc.
4. Allocate your investible funds based on your risk profile
Invest more in high growth assets like stocks/ equity mutual funds (risky in the short- run but not in the long-run) in the early phase of your career when risk appetite is high and less in stocks and more in fixed income assets (debt funds, bank deposits) as you approach retirement. Regular investment in equity/equity mutual funds through SIPs (Systematic Investment Plans) in the early stage on one’s career can yield substantial returns in the long run. This investment strategy can take care of retirement planning too.
Financial planning in brief
1. Buy your home.
2. Buy adequate health cover. Buy life insurance cover if you have a family to support.
3. Set apart money for 6 months expenses for emergencies. Put this money in a savings bank account or invest in a liquid fund.
4. Live within your income and save enough. Invest this savings intelligently as explained earlier in investment planning. This will take care of retirement planning too.
5. At the appropriate time, prepare a will.
Plan for a secure and happy tomorrow.
Posted: February 2018