Financial Planning to Meet Your Future Ambitions

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Joined: Sep 11, 2018
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All of us do some bit of planning to manage our income, savings, expenditures, future liabilities (cash we count on to devote inside the future) whether or not we understand anything about financial planning or not. Even though we may be managing it nicely for now, it might not be the top strategy to do or it might not give us the ideal final results. Even though financial planning may well sound technical, all it indicates is how do you recognize your future earnings and liabilities currently, list down your present earnings and expenses, see if there is shortfall between what you'll have to have within the future and what can get to with current implies then program your savings and investments to overcome that shortfall.

List Existing Income & Costs:
Start with your current income which should include your salary, salary of other working members within the family, any other revenue like rent, business income etc. Add it all up and remember to also deduct the taxes you'll pay on each of the earnings to finally arrive at the net revenue for your family at present.

After having arrived at your family's net earnings, deduct all expenses like household expenses for the year, tuition fees, loan EMIs or any other short-term liabilities (expected within next 3-5yrs) you foresee like renovating the house or a medical treatment etc. Post this deduction what you now get is the savings you have that you will need to invest wisely for the future.

Setting Future Life Goals
The next step in financial planning should be putting down all your future financial liabilities, the time when they will arise, the amount you will require etc.

Goal 1: For instance, if you are a 40 yr old man and anticipate your daughter's college education to be due after another 8 yrs and anticipate this may well cost around 30 lakhs then, will you have the income to finance it? Decide on an investment and the amount that you have to have to make nowadays to achieve this goal 8 yrs later.

Goal 2: Similarly, if you intend to retire at 60 yrs, you have to have say 1 lakh p.m to maintain your existing lifestyle which is INR 50,000 in today's value. Given the advances in healthcare, you can easily anticipate a 25-30 year long retired life. The funds you need to have to live your retired life can be funded by a long-term low risk investment (like debt mutual funds, pension plans) made today. Set aside some money for such an investment to be made currently.

Goal 3: You may well set aside money for buying some health insurance that you will require during your retired phase or even earlier. The insurance premium needs to be funded from your present savings.

The goal setting process helps in understanding your future requirements, quantifying them and making investments within the right asset class to fund each of the objectives when they become due.

Asset Allocation:
Whilst asset allocation can be done along with goal setting, it is better to understand how asset allocation can impact the success of your financial program. You can invest your savings in various asset classes like equity, debt, gold, real estate etc. Look at the investments you have already made like if you own a PPF or EPF account, money you have invested in bank FDs, home loans you are paying etc. From the present savings and investments, you have already made, calculate the percentage of allocation made to each asset class. For instance, all bank FDs, PF amounts, govt bonds, debt-oriented pension plans should be classified as debt. Any cash invested in IPOs, company stocks, equity mutual funds should be classified as equity, loan EMIs should be classified as real estate etc.

As a thumb rule, 100 minus your present age should be allocated to equities and equity like product. If you are 40 yrs old, 60% of annual savings should be invested in equity like products and the balance in debt products. If your current investments don't seem to reflect this, try balancing your investments by reducing the funds you put in debt products like FDs and bonds and divert that money towards equity mutual funds or stocks.

Most people are not comfortable investing in stocks as it requires special research, constant monitoring and a lot of undue stress. Hence equity mutual funds are a better option since your revenue is professionally managed by fund managers who do all the research on companies before investing and continuously monitor the performance of the fund by buying good stocks and selling underperforming stocks.

Start Early
You must start your financial planning early because this will give you the advantage of compounding example whichever option you choose to invest in, your dollars will get to grow for longer duration with returns compounded every year.

Annual Review & Rebalancing
Though a sound financial program is a good starting point, following it with discipline and rebalancing your portfolio every year is very important. Since life circumstances change frequently, you must relook at your plan along with your financial advisor and make changes to reflect your new circumstances.
About author: Thomas Shaw

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