When ever I discuss with someone regarding financial planning every individual has their own way of thinking and doing it. Most common answers are
1> I don’t have any financial planning or tax saving investment. Thinking to start.
2> I have 2 or 3 long term ULIP or Insurance or FD. Approx. 20 to 25years.
3> I send money to my father monthly he takes care of my financial investment.
4> I have taken home loan and one insurance policy.
Most of us don’t really know why we need to do financial planning. But few people are very good at it.
After education life we enter into professional life and first two to three years we always try to fulfill our “I have to” demands and at the end we start thinking about saving money and other investments. Lucky people are guided by their beloved ones like parents and relatives they send money to their parents for financial planning and future needs.
Why we need to plan our personal finance or is personal finance means tax savings investment only? Really confusing for people who just started their professional life.
Definition – A key component of personal finance is financial planning, a dynamic process that requires regular monitoring and reevaluation. It has five steps
I. Assessment
II. Setting goals
III. Creating a plan
IV. Execution
V. Monitoring and reassessment
Let us understand above points,
Assessment – One can assess his/her financial situation by comparing Financial Balance Sheet and Income Statement. Personal balance sheet is Bike, Car, Cloths, Bank A/c, etc, along with personal liabilities like credit card, personal loan, home loan, etc. Personal Income statement means income and expense.
So friends please check all your credit card bill or Loan EMI statements. You should be able to realize where you are.
Setting Goal – After assessing your income and expense and liabilities you can set a better goal for yourself. One can set long term and short term goals. Long term goals – i> Buy a house or flat in 2 to 3 years and repay home loan with in 10 to 25 years. ii> Retire at age of 60 or 65 years with Rs.2 core = $20 Million. Short term goals – i> Buying house holds within 1 to 2 years of time. ii> Buying Bike or Car within 1 or 2 years of time, Etc. So setting goals helps direct financial planning.
Creating a Plan – Financial plan should have details information how to accomplish your goal. While creating a plan you should take care about reducing unnecessary expenses, investing in good stocks and other areas which have good real return after tax.
Execution – Execution of one's personal financial plan often requires discipline and perseverance also lot of sacrifice. If you have problem to execute your financial plan you should look for assistance and you can validate your plan and execution process with financial experts.
Monitoring and Reassessment – As time passes, personal financial plan must be monitored carefully and can be reassessed and adjusted based on needs.
So friends I feel after reading the above information you got some idea how to start.
Let us understand few more things of the real world. Let us take an example where person starting from level 0.
Financial Plan can be explain (Long Term + Short Term + Life Insurance + Medical Insurance + Tax Saving Investment + Cash in hand) – Expenses and Liabilities.
Cash in Hand – After assessing your needs you should be able to figure out your every month expense. If your monthly expense is Rs.10000/- then you should have at least 4 to 5 times cash in hand 40000/- to 50000/-. So that you can manage your expenses in hard times like time of changing job or if you lose your job because of your company goes for bankruptcy or any bad situation or recession time when you need cash to handle it. Don’t think I have Rs.50000/- my monthly expense is 10000/- so I can take 15000/- from it and buy a good phone or mp3 player or iPod, etc.
Long Term Investment – Taking a home loan. Buying a land, Invest in long term fixed deposit, ULIP plans, Invest in PPF, invest in gold or gold funds, invest in Bonds, and invest in share market.
Short Term Investment – Investing in Mutual Funds, short term fixed deposits, buying short term ULIP plans, buying govt. security certificates, Invest in short term MIS.
Life Insurance – Most of the Insurance experts says our life insurance coverage should be 7 to 8 times or more of our yearly income. If your yearly income is Rs.100000/- then you should go for Rs.700000/- to Rs.800000/- life insurance coverage. Please don’t take life insurance for investment purpose as it has very low real return. So you should look for less premium and more coverage like plans or term plans.
Medical Insurance – You should have medical insurance, if you are covered from your company then validate coverage amount if that doesn’t satisfy your needs then take a personal medical insurance policy. If you have dependent take policy for them without any delay.
Tax Savings Investment – It means you are investing for saving your income tax. As per Indian Income tax act 80c you can invest maximum Rs.100000/- [refer financial websites for latest information]. My suggestion is take risk in early age when you have less responsibility. The global risk calculation is (100 – your age). So if your age is 25 then your risk taking capacity should be 100 – 25 = 75% [may change based on situation].
If your age is below 30 years you can take 70% risk. You may divide your 80c,
100000 = short term [50000] + long term [50000]. If your company is deducting PF then calculation should be 100000 – PF Amount = short term + long term.
Be very careful while choosing any investment if you don’t understand the risk and real return take help of your seniors or financial experts also financial websites like www.moneycontrol.com & www.economictimes.com are there to help you.
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