1. What is Financial Planning?
Financial planning is the process of accepting a formal strategy to accomplish your financial goals. It is a process where you plan your financial inflows, outflows, investment, and savings in a way that you successfully meet your financial goals in the future like retirement, kids’ education, purchasing a house, etc.
The goal of financial planning is to invest your money in the correct manner so that you do not need to encounter any type of financial crisis. This work must be done in order to make short-term as well as long-term goals secure.
2. How to set financial goals?
Setting financial goals is the very first and most important step of financial planning. You cannot rightfully invest your money until you are certain about goals. While setting goals, you have to keep certain things in mind:
SMART Goals:
- Specific: The goal has to be brief.
- Measurable: The path towards the goal has to be measurable.
- Achievable: The goal has to be attainable.
- Relevant: The goal has to be suitable for your life and financial situation.
- Time-Bound: Fix a time frame for the goal.
Short-Term vs Long-Term Goals:
- Short-Term Goals: Such as vacation fund, emergency fund.
- Long-Term Goals: Such as retirement planning, children’s education, buying a home.
You need to categorize your financial goals based on time horizon so that you can trace and achieve them easily.
3. Examine Income and Expenses
A necessary component of financial planning is evaluating your income and expenditure. For evaluating your financial position, you have to first maintain a note of your monthly expenditure and income.
Income:
Firstly, estimate your monthly income. This may be salary, freelance, business income or rent earned.
Expenses:
Split your monthly expenditure into:
- Fixed Expenses: Such as rent, loan EMIs, electricity bills.
- Variable Expenses: Such as grocery, leisure, eating outside.
By examining your income and expenditure, you can minimize your wasteful expenditure and boost savings.
4. Need to establish an emergency fund
Development of an emergency fund is a very crucial financial planning step. An emergency fund refers to a savings that you have developed in anticipation of financial emergencies, such as medical emergencies, loss of a job, or unforeseen repairs.
The amount of the ideal emergency fund should be your 6-12 months expenses. It gives you a financial buffer when you suddenly need cash.
The emergency fund can be invested in short-term low-risk investment products, like savings accounts, fixed deposits, or liquid mutual funds.
5. Planning for Investment and Investment Allocation
Investment means increasing your money. When deciding on your budget, you have to invest money in the correct way. For minimizing risk, you can disperse investments into different directions. Some good thoughts of investment are:
- Stocks: High-return-high-risk kind of investment. If you own a long time investment outlook, stocks will prove to be worthwhile.
- Mutual Funds: If you do not wish to take the risk of investing in the share market directly, then mutual funds may be a suitable option for you. Mutual funds are managed by professional fund managers.
- Bonds: These are low-risk investments, which give you fixed returns. Bonds can be invested for long-term financial objectives.
- Real Estate: Real estate investment is long term as a vehicle to grow. Real estate will give you returns either as rent earned or appreciation in the value of the property.
- Retirement Plans: Investment in pension schemes such as PPF, NPS, and EPF for future security is necessary.
Depending on your investment risk profile and financial objectives, investment allocation has to be done.
6. Tax Planning and Optimization
Another crucial part of financial planning is tax planning. You need to invest in tax-saving investments that will allow you to save tax and meet your financial objectives effectively. Some of the most popular tax-saving instruments in India are:
- Section 80C Investments:
- Public Provident Fund (PPF)
- National Savings Certificate (NSC)
- ELSS (Equity Linked Savings Scheme)
- Tax-saving Fixed Deposits
National Pension Scheme (NPS): If you invest in NPS, not only can you save for retirement but you get tax benefits besides that too.
Health Insurance: You even get a deduction on the cost of health insurance under Section 80D.
By integrating tax planning within your overall financial planning, you can effectively manage your tax outgo.
7. Retirement Planning and Future Security
The final aim of financial planning is financial security at your retirement time. While planning retirement, you need to estimate your future expenses, so that in your old age you won’t feel the sting of money.
Retirement Corpus: You will need to make a corpus for retirement. This corpus will be utilized to take care of your expenses post-retirement.
Retirement Savings Plans:
- Public Provident Fund (PPF)
- National Pension Scheme (NPS)
Annuity Plans: Annuity plans give you regular returns after your retirement.
Asset Allocation: Once you are in the latter years of your life, you need to convert your investments into low risk investments like fixed deposits and bonds.
It is really important that you plan your retirement very early in life so that your investments become valuable over time.