Financial Planning
To increase the probability to success, one needs to plan and organize his finances early.
One of the most powerful words in our dictionary is Money. We spend more than half our lives working and saving, but hardly spend any time planning on how to invest the hard-earned money effectively. This is why one needs financial planning. While managing your finances making the money work for you is more important than working for money. Understanding the difference between saving and investing will make all the difference for your financial planning.
Golden rules for financial planning
What is my current net worth?
Make a list of your current assets and liabilities. Assets are things you own and have value such as cash, saving accounts, personal property, stocks, bonds and pensions while liabilities are the values of the things you owe E.g.- bills to be paid, debts such as car loans, home loans, credit card debt, or student loans.
Net worth is as simple as (Assets and investments)- (Debts +liabilities)
Organize and track your financial records· Record Keeping
Maintain a filing system of your bank account statements, insurance policy details, mutual fund statements, bills, investment plan statements, tax returns and any other type of document that is related to your financial life. Keep close track of income, expenditures, and cash flows. Doing so will help you understand how you currently spend your money.
What are my long term and short term financial goals?
Personal financial planning revolves around goals. What you want your lifestyle to be like in the present, near future and distant future, then create an outline of your goals which covers every facet of your life. Jot down your short term and long term goals. Planning kid's education, their marriage and your retirement are long term. Buying a car or planning a vacation could be short term goals.
How much money do I need and when?
Try to analyze how much money you would require for every goal, arrive at a figure by factoring the inflations. Eg-how much you need to save in order to comfortably afford your retirement. People often do this for individual items as well- i.e., their dream home or their next car and how much is required for it and when you want to buy.
How much risk can I take?
Uncertainty is a part of every decision. High, medium or low risk would depend upon age, liability, income, investments and dependents. The best way to consider risk is to gather information based on your experience and the experiences of others and to use financial planning information sources.
Where should I invest? Implementation and review
Depending upon your goal and savings you need to make a right investment plan. Also taking into account your time frames, financial situation, risk appetite and tax position. Holistic financial planning involves understanding of your financial goals and tools to achieve those goals. Investment horizon, age, return expectation, and taxation should also be kept in mind while making the investment plan.
Short-term investment options
Bank deposits:
They are the safest and they also offer assured returns. Though is taxed, use them only for keeping contingency funds i.e., money needed for unforeseen future expenses.
Company deposits:
They are the safest and they also offer assured returns. Though is taxed, use them only for keeping contingency funds i.e., money needed for unforeseen future expenses.
Mutual funds:
Mutual funds can be opted as short term or long term investment. Mutual funds allow small investors to access diversified portfolios like equities, bonds and other securities with a small amount of capital. It can be purchased or redeemed at current market value.
Stocks:
Investing directly in stocks can be extremely rewarding, but it is also risky. You should attempt it only if you have a sound knowledge about the working of the stock market. You should also have enough time choose the right stocks and monitor them.
Long term investment plans
Life-Insurance Plans
Life insurance plans provides risk cover for individuals and their family members with attractive tax benefits.
Do you know what is EEE?
Exempt during investment stage
Exempt during earning stage
Exempt during withdrawal stage
Public Provident Fund
PPF account opened in any bank or post office is one of the best long term investment products. Under this, the money will be locked for a period of 15 years and earn compound interest. You can also extend the PPF account to 5 years. In addition it is totally tax free. PPF comes under EEE category. i.e., it is tax free during investment stage, earnings stage and withdrawal stage.
Real Estate Investment
Real estate is a booming industry in India. It has huge prospects in all the major sectors like housing, commercial, manufacturing, hospitality, retail. But to avail that benefit, one has to do a proper research and then buy some property in places where prices could go up to some significant level in next 5·10 years horizon. Real estate investments are easy to liquidate and cumbersome to maintain.
Government sector bonds
Investing in bonds could be a good option. There are many good government bonds which actually give a decent return in long term. They are safer means of investment. Government also issues tax free bonds to fund infrastructure projects.