We all plan a bit to manage our income, savings, expenses, and future liabilities (money we expect to spend in the future), whether we understand financial planning or not. While we may be handling it well at the moment, it may not be the best way or it may not bring us the best results. While financial planning may sound technical, it’s just how to identify your future income and liabilities today, list your current income and expenses, and see if there’s a gap between what you need in the future and what you can achieve current funds, and then plan your savings and investments to fill that gap.
List current income and expenses:
Start with your current income, which should include your salary, the salary of other working family members, any other income such as rent, business income, etc. Add it all up and remember to subtract the taxes you pay on each income to get your family’s current net income.
After you determine your family’s net income, subtract any expenses such as household expenses for the year, college tuition, loan EMIs, or other short-term liabilities (expected within the next 3-5 years) that you anticipate such as B. the renovation of the house or a medical treatment etc. After this deduction you now receive your savings, which you must invest wisely for the future.
Set goals for future life
The next step in financial planning should be to determine all of your future financial liabilities, when they will arise, the amount you will need, etc.
goal 1: For example, if you are a 40-year-old man and you expect your daughter’s college education to be due in another 8 years and then assume it will cost around 30 lakhs, you will have the money to fund it ? Decide on an investment and the amount you need to make today to achieve that goal 8 years later.
goal 2: For example, if you intend to retire at 60, you will need 1 lakh pm to maintain your current lifestyle, which is worth INR 50,000 today. With advances in healthcare, you can easily expect to live 25 to 30 years of retirement. The money you need for your retirement life can be funded today through a low-risk, long-term investment (like debt funds, retirement plans). Put some money aside for such an investment to be made today.
goal 3: You can set aside money to take out health insurance that you may need during your retirement or even earlier. The insurance premium must be funded from your current savings.
The goal setting process helps in understanding your future needs, quantifying them and making investments in the right asset class to fund each of the goals at maturity.
While asset allocation can be done along with goal setting, it is better to understand how asset allocation can impact the success of your financial plan. You can invest your savings in different asset classes like stocks, debt, gold, real estate, etc. Look at the investments you have already made e.g. pay etc. From the current savings and investments you have already made, calculate the percentage allocation to each asset class. For example, all bank loans, PF amounts, government bonds, and debt-based pension plans should be classified as debt. Any money invested in IPOs, corporate stocks, equity funds should be classified as equity, loan EMIs should be classified as real estate, etc.
As a rule of thumb, 100 minus your current age should be allocated to stocks and equity related products. By the time you’re 40, 60% of your annual savings should be invested in equity related products and the rest in debt. If your current investments don’t seem to reflect this, try to balance your investments by reducing the money you invest in debt instruments like FDs and bonds and redirecting that money into mutual funds or stocks.
Most people don’t feel comfortable investing in stocks because it requires specialized research, constant monitoring, and a lot of unnecessary stress. Therefore, stock funds are a better option as your money is professionally managed by fund managers who do all the research on companies before investing and continually monitor the fund’s performance by buying good stocks and selling bad-performing stocks.
You need to start your financial planning early as this will give you the advantage of e.g. B. Regardless of the option you choose to invest in, you can grow your money over time and compound the returns every year.
Annual review and rebalancing
While a solid financial plan is a good place to start, following it with discipline and rebalancing your portfolio every year is very important. Because life circumstances change frequently, you must review your plan with your financial advisor and make changes to reflect your new circumstances.