Everyone should ensure resourceful financial planning which will consist of goals, irrespective of their age, income profile, risk, and should have an asset provision. The financial plan should explain what assets to invest in and get significant exposure to those assets. Every investor should take a look at a financial plan on an annual basis which will help them to assess the validity and optimality of the same.
An individual should also plan for life measures and changes in the upcoming year that may affect the financial situation in the coming years, such as school/ college admission for children, functions, purchase of a house, etc.
The first thing every individual must do is create a balance sheet of all their assets and liabilities. The balance sheet must have every transaction of all the assets that the individual has invested in. This will also help an individual to keep track of all transactions and plan your finances in a more resourceful manner and decide your goals and assets.
Following are the points that can ensure your financial planning is on track:
1. Positively save every month no matter what
This is a very important part that helps you assess how much you save from your monthly income. An individual must save from the income according to the financial goals. From an individual’s salary, he should save 20-30% of surplus then only he can plan a better financial plan for wealth building purposes. A coin saved on a routine day would definitely help us on a rainy day.
2. Your net worth is going up on a yearly basis
An individual should understand whether his or her net worth is increasing on a yearly basis. If the net worth is increasing then it is great but if the net worth is decreasing then an individual has to work on it and savings should be done. In every month an individual has to invest to increase the surplus in an initial level of life. At every step of life, net worth needs a check so that investments and asset allocation can be done or reorganized based on the scenario.
3. Not heavily dependent on loans
Many individuals are depending on credit cards and they use them very frequently like personal loans, etc. This is an ongoing process and the debt keeps building up. It is harmful for financial plans and it will be difficult for the credit score for future taking long-term loans.
4. Are you protected by external risk?
It is very important to safeguard from other external risks. Accidents, medical emergencies will destroy your savings and will disturb your financial goals. So, an individual must have insurance policies like health insurance.
5. Bear expenses without external help
Sudden expenses like medical emergencies etc. can not be planned well in advance, there should be a certain amount allocated towards such unplanned contingencies. You should not lock all savings and should mark up some of it towards contingencies. This would save you an additional burden of interest etc. on the loan amount.
6. Consistent savings from your income
An individual should invest a fixed amount from the salary of every month. If your salary is 60K per month then you have to invest 6K every month. As the savings are done by an individual then only there is an increase in wealth. Starting with the small investments we can move to the large investments like mutual funds, share markets etc.
7. You should not over-leverage
You should not be overleveraged. If your salary is 60000 and your EMI is 45000 then it will be difficult to handle all the other expenses. It feels very convenient in the short term but on a long term basis, it is difficult to handle it. So, one has to manage the leverages and the left-over amount after paying leverage for the expenses and it should not be a burden.
8. Return are real earnings
The returns on investments must be fair and this should not happen that invested amount will bear less amount of interest or return. The analysis should be done beforehand and then the investments are to be done. So, the amount must be limited in a savings account and the investment in assets should be more to get more returns from mutual funds, shares, stocks etc.
9. High-level clarity from financial plan
An individual has to be clear while investing and managing the financial goals. The future goals must be focused on and keep in mind while planning the finance. The unclear goals must not be good for balanced financial affairs.
The article tries to sum up the pointers for checking whether your financial plan is on track. However, financial planning changes as per financial goals of the individual, risk appetite, and wealth-building requirement. Hence, it is recommended that the financial planning should be carried out by the professionals and should be revisited periodically to see if needed to maintain the validity and viability of the same.
Financial planning in 2021 – The year 2020 was one of such nightmares which many of us would definitely like to forget at all costs. Nevertheless, this year also taught us a lot about many aspects of life which we almost pay no attention to. In all, with the announcement of the vaccination drive for COVID-19, the year 2021 has rung a bell and has shown us a ray of hope in the gloomy times.
But has everyone learned the lesson for good from the year 2020 and has started acting upon it. New year resolutions have not gone stale yet and we would like to remind you as to how you can make the year 2021 the best year.
As we have steered ahead in Unlock 2.0, now slowly the finances, economy, employment markets, stock markets are beaming up. But until and unless you understand how to carry out financial planning for this new year 2021, you won’t be able to achieve much this year too.
So, let’s learn some quick tips for financial planning for 2021:
- Make financial resolutions for 2021 and stick to it
New year resolutions are really fun and motivating, but how to ensure that we stick to those? Try to mix consistency in your daily routine and reap the benefits of a loyal disciple of your own resolutions.
You could build a budget which may be designed to help you achieve some goals which may be
- Tax saving
- Retirement planning
- Vacation planning
- Emergency fund arrangements
- Wealth building for the long term
- Cutting back on unnecessary spending and shopping etc.
The list is exhaustive but it is always recommended that you should build a financial budget to ensure that at least 3 of your financial goals are achieved. Sticking to the budget is very easy and there are also some tools and apps available for your convenience.
- Tax Planning
Most people usually interpret tax planning as last-minute investments into anything which will suffice the deduction limit. However, there is much more to tax planning. Not all tax-saving instruments are made up to suit everyone’s risk appetite and investment goals. Let’s take the example of Mr. A who needs to invest in tax-saving instruments. Mr. A also wants to make most of it even where he is ready to accept moderate risk. Mr. A should invest in ELSS – Mutual Funds (blue chip or large-cap typically), which would allow him to claim deduction under section 80C. One more advantage is that Mr. A will be able to earn around 12-13% with moderate market risk.
- Investment Goals
If there is no goal, then there could be no financial planning. Ideally, financial planning would be divided into 3 types of goals
- Short Term Goals
Tax planning or contingency fund planning is usually the short-term financial goal. Short Term goals cover the time period of 1-3 years. The investments with a lock-in of 3 years period or investments with maturity for such a short period would be suited to meet certain annual cash flow or expenditure. A most suitable example of such expenditure would be insurance payments or school fees payment etc.
- Medium Term goals
A most appropriate example of a medium-term goal would be buying a house or school fees till graduation. Vacation planning can also be carried out in the medium term.
- Long Term Goals
Retirement planning would be peculiar examples of Long term financial planning. Investments having longer payment periods or with maturity/redemption expected at a much later date than 10 years would mostly be suitable. Equity investments would be also suitable for long-term financial planning.
- Medical Insurance
With COVID 19 in the background of the year 2020, the upcoming year 2021 would also be witnessing some ups and downs in the health security area. Following points to ensure that you are on the safe line.
- Revisiting the medical insurance coverage
- Check whether the current insurance cover is sufficient to cover hospital admission, room rent, etc.
- Check whether the medical insurance covers the major and terminal diseases
- Understand that it is better to pay the premium now and reduce the bigger cashflow at the time of the actual incident.
- Take care of your health
The year 2020 was a lightening effect to make us understand the benefits of good health. If you have good immunity, then you can definitely save yourself from multiple diseases and in turn much of your money too.
Subscribe to the Yoga class, take admission to Gym, take out time for a healthy jog. Break the routine of Work from Home and try to get out for fresh air. This will reduce mental stress and as well as add to the health benefits.
- Revisit the retirement plan
With COVID 19, many of us saw the actual job loss and pay cuts. This shows how critical it is to ensure that we revisit our retirement planning. While you assess the retirement plan, here are few things to check on
- Inflation factor
- Increased expected medical expenditure
- Reduced pay or no income in some cases
- Liquidity crunch etc.
- Create an Emergency fund
It is a known fact that a fund equal to six months of your income should be maintained as a liquid investment so that it could be used in the event of no active income source. Ideally, an emergency fund can be created by investing in short-term fixed deposits or recurring deposits, or mutual funds.
- Learn something
Learn something new which will help you either in getting-
- an increment in the current job or
- a new job or
- promotion etc.
This new skill may also help you add an additional income stream which you could use as an emergency fund.
- Strengthen your credit score
Try to pay off loans with the highest interest rate first. Also, avoid buying things on credit cards. Once you default on loan repayments, it hampers your credit score badly. So always make sure that you are not defaulting on repayments.
- Say no to unnecessary investments and tips
Most of the investors usually go out and make investments based on insider tips or commission agents’ advice. Try to take the help of a professional if you can not do it yourself.
These 10 Tips will help you out in building a sustainable financial plan for the year 2021. These pillars will help strengthen financial health in the coming years. Having said so, just building a plan is not enough. You will need to ensure that you stick to the Financial Resolutions to make it work for you.
‘The only thing that is constant, is the change‘, remarked a famous Greek philosopher and he was not wrong. Everything in the world changes and so does your financial requirements. As you grow older, your financial responsibilities change as per your financial goals. You are, thus, advised to review your financial portfolio at regular intervals and ensure a sound financial plan. Do you do so?
If you don’t, you should start immediately. If you do, well, congratulations to you. While reviewing your financial portfolio is a commendable job, are you careful when you review? Most individuals aren’t but you should be. Here is a checklist of questions that you should ask yourself when you review your financial plan –
What are your present and future financial goals?
When you are young you want to plan for your future. When you start your family your children’s education becomes your primary goal. You might also want to build your dream house or go on a world tour. Whatever your financial goal you need to plan for it. Since your goals are dynamic, you should consider them when reviewing your financial plan. Find out which financial goals require planning for your present and future life.
What is your current disposable income?
Your disposable income determines the quantum of savings and the investment instruments which you can opt for. Since your disposable income might change over time, your financial plan should be reviewed in tandem with the changed income. If your income has increased you should increase your investments. If on the other hand, your income has decreased you might have to reduce your ongoing investments.
Related Article : Personal Financial Planning – Why Is It mandatory For All ?
What is the performance of existing investments?
The financial market is also dynamic. It changes continuously and so does the value of your investments. For instance, fixed deposits and other fixed-income investments are now promising a lower rate of returns than they did 5-10 years back. So, you should review the performance of your existing investments. If your investments are doing well you should invest more in the same. If, however, their performance has dwindled it’s time to switch. Redeem the low-performing investments and redirect your money to more lucrative avenues.
How much tax, are your investments helping you to save?
Investments become sweeter when they help in saving taxes. While some investments give you tax exemptions at both the investment and redemption stage, many give tax relief only at the time of investments. Moreover, there are some investments where you do not get any tax relief. Review your investments to understand how much tax you are being able to save. Try and maximize your tax saving potential by choosing investments that are tax-efficient and redeeming those which are not.
Do you have a sufficient contingency fund?
A contingency fund is essential to meet the costs of those rainy days when a financial emergency might strike. You should hold at least 6 months’ worth of your income in a contingency fund. When reviewing your financial plan make sure that you have planned for a contingency fund. If you have, check its sufficiency. If you haven’t, make it a priority in your financial plan.
Is your Insurance cover sufficient?
Insurance is an essential requirement. Both health and life insurance plans provide you financial security and help at the time of a financial crisis. Having sufficient cover is, therefore, necessary for both these plans. You should, thus, check whether the coverage you have already opted for is optimal or not. And for those who have no life or health insurance plan in their financial portfolio, having one of each is recommended.
Reviewing your financial plan is essential and keeping these questions in mind is the smart thing to do when you review. If you plan according to the above-mentioned questions you would be able to create a fool-proof financial portfolio that would not only meet all your financial goals, it would help in wealth maximization too.
Mastering the subject of personal finance might not be everyone’s cup of tea. Luckily, it is not always required to master the intricacies of everything when you can hire professionals who are well versed in the same. Today we are going to take you through the reasons of prime importance to hire your own financial advisor from the very onset.
- Holistic Analysis
Financial consultants can assist you in developing a big-picture and comprehensive analysis of your finances. Rather than being just one thing, personal finance is more like a constellation of concerns comprising investment, savings, estate planning, retirement planning, tax preparation, and many more. For gaining complete success in the field of finance, you need to have a robust plan in place which will address individual issues in a responsible and intelligent fashion. Your personal financial advisor might thus seek input from you whenever required for planning every specific area with greater detail.
- Creation Of An Investment Portfolio
Top financial advisors hold the view that 90% of our investment returns are a direct function of asset allocation which comprises the money invested in bonds, stocks, mutual funds, and similar vehicles. However, some people might feel too intimidated by the same due to the conflicting investment information for deciding on the ones which need to form a part of their corpus. This is where financial advisory services can come into your aid coupled with ample experience which arises out of helping other people in setting up their investment portfolios. You can thus rest assured that your funds will be in the best hands as the financial consultants set up automatic transfers for adding money to your investments after scheduled intervals.
- Tax Preparation
Tax preparation stands out as one of the most dreaded personal finance errands and only a few professionals who understand the intricacy of tax code enjoy dealing with the preparation of tax records. This is another area where you can seek out the assistance of financial tax planning services for filing your return in the correct format and within the stipulated time frame.
- Estate Planning
Contrary to popular belief, the estate comprises of all your assets including investments, businesses, real estate, insurance benefits, legal rights, etc. And without a proper plan in place specifying the division of all your properties, in your absence, it might get difficult for your beneficiaries to inherit whatever you intend them to. This is where the best financial planners in India come in to bring together all wills and documents to guarantee the division of your estate in accordance with your wishes. The legal complexities, as well as consequences that might accrue in this field, can prove out to be highly complex for laymen making the interception of professionals mandatory.
- Setting Proper Savings Goals
Personal financial planning advocates the inculcation of savings habits for building a solid financial foundation. Your options are bound to expand with the greater quantum of savings at your disposal whether you are helping your child with higher education, building your dream house, or paying for your parent’s medical bills. Financial planning experts understand very well that saving for a particular reason can boost you up a lot more than saving vaguely. This is why they assist us in developing specific goals over both the short and long term to help us stay focused.
Related Article : Personal Financial Planning – Why Is It mandatory For All? – Fintoo Blog
A fact find is conducted by financial advisor companies wherein detailed questions are enquired about your circumstances, risk appetite, and end goals after which financial products are recommended to the end-users in sync with their suitability and affordability. Certified financial planners can offer a plethora of services ranging from investment and general financial planning to more specialist advice. So, appoint a financial advisor to take care of your money matters today and devote your precious time and attention to prospering other work fields.
Are you an earner? Or a non-earner? Whoever you may be, you certainly need to know personal financing. We all want to be stabilized financially, at least to fill current & future standard of living. Your money is the only thing that earns for you, that too for free! Then why not to make optimum use of it? Why not to plan to easily fulfil our goals/wishes may it be short term or long term. You never know what’s coming up in your life next minute… whatever may it be, you are gonna earn & spend even after your last breath… Right time to think upon this is now! Well! It’s neither a cheesy plan nor a scheme which will give 200-500% returns. It’s an effort to make you understand WHY!
Personal finance is nothing but your OWN money to plan for…. All you need to do currently is to plan your needs & invest accordingly so that you get back the right amount at right time.
Related Article :- Quick tips for financial planning in 2021 – Fintoo Blog
As laymen you might be coming across many questions eg:
Let’s understand the obvious complicated reasons why it’s mandatory to plan:
- Lifetime Cash flows: ‘Money earned today is a money spent tomorrow’ You know your basic expenses whether fixed/variable which is to be spent for a lifetime may it be regular bills, food expenses, the standard of living expenses, dependency expenses, what not…
- Asset Allocation: Investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. Asset allocation means investing an individual’s assets to meet a financial plan
- Dreams: ‘Money earned today is to fulfil your lifetime dream tomorrow’ Your main purpose of earning or saving is to lead a life as per your dreams. You know your dreams & the money required to fulfil it. May it be owning a Home or a Foreign tour or a status car or to give the best gift to parents and children or to follow your dream career prospects. You will require a risk appetite to go for your desired path before you decide to change the living.
- Uncertainty & risks: ‘Money spent today is a loan tomorrow’ You know life takes a down-turn for which you need job security, a good economy, it may even come as accidents. Uncertain events to test your preparedness are bound to come, an option to face it is by financial loan or a pre-planned readiness.
- Earnings: ‘Money saved today is a money earned today’ You know your income and respective savings. You know the more you save the more you will be relaxed for the future. But just savings are not enough. Let your money earn for you as well and let it give you good returns.
- Returns: ‘Money invested today is extra money received tomorrow’ The money you save, the money you invest, the return you get is an important thing of your life. If you save but not invest then returns will be nil, in fact, you will realise a negative income due to increasing inflation. Returns should be equivalent to increasing cost of living with minimum risk an individual can take.
- Expenses: ‘Money saved today is a lump sum spent tomorrow’ You know forthcoming events to which you require a huge cash outflow. It can be a marriage or medical expenses or a child’s education or for other functions.
- Retirement: ‘Money earned today is a money essential tomorrow’ You know at a point all you will be doing is to sit back whole day and cherish the entire life journey with a cup of coffee at your own farmhouse. Don’t you want to spend a few years with no tension surrounding you forever at that point of time.
There are en-number of reasons I can give to plan your finances today, but how much of it can you give yourself? You don’t need me to make you realize or count the reasons of why to plan your personal finance. All the reasons enumerated above are already known to you, the difference is that you haven’t realized it yet.
A survey reveals that finance related topics are important and there is an unawareness amongst working people about it. The results even show that retirement planning is very important along with long-term financial planning. The survey suggests that future educational drives/programs should focus on importance of personal finance & its basics where people have inadequate knowledge. Hence, we conclude that, overall awareness amongst people can bring knowledge about personal finance…
Related Article :- 8 Common Investment Mistakes You Must Avoid – Fintoo Blog
Once you learn & appreciate the importance of planning your personal finance and its impact, you will see lot of opportunities to increase your wealth & improve your personal finance plan and knowledge. All you need is an active mind and a proper guidance so that your finances are in your hands and you lead it. Set up and make your own future.
Financial planning is so crucial and is different for every individual. It differs based on the age of a person, his risk appetite, his current investments and the most important factor – his goals.
Keeping this in mind that “No one financial plan fits all”, today in this blog we will be discussing a case study of Mehta and family (Name changed) to help you get an idea of how to plan your finances. Check this out and see if you relate to Mr. Mehta.
Mr. Mehta is 35 years young man and is married to Jyoti who is now 33. They both have a son, Ansh. He just turned 2. They are living a comfortable life in a small apartment of his own in a good locality.
Let us have a look at his financials now.
His current annual income (net in hand) is Rs. 10.80 lakhs, which is Rs. 90,000 per month after taxes. His family household monthly expenses are nearly Rs. 70,000. He invests Rs. 15,000 per month, and saves Rs. 5,000 per month. He expects his salary to grow at 10% per year from next year onwards.
Jyoti, on the other hand is a home maker and hence is not earning any salary. However, she does baking at home and sell her cakes in the society itself. This brings in around 10,000 on a monthly basis to her.
Mehta’s have a family floater medical insurance that covers them and for this, he pays Rs. 12,000 per year. His company also provide medical insurance but he doesn’t know much about it. Apart from this, he has no other insurance. His accumulated EPF is Rs. 1,00,000 and he invests Rs. 1800 per month into his EPF, which his employer matches.
Assets and Liabilities
We will now try to have a better understanding of his assets and liabilities.
He has a PPF account where he invests Rs. 70,000 per year and wants to continue doing so. The current value in the account is Rs. 11 lakhs. Mr. Mehta has equity mutual funds worth approximately Rs. 5.50 lakhs, and direct equity of Rs. 2.50 lakhs. He has liquid funds worth Rs. 85,000. He has no gold exposure. His residential home is worth Rs. 2 crores.
- Buying a bigger house is what Mr. Mehta looks forward to. This will cost around 3 crores. He wants to achieve it as early as possible by taking loans.
- Mehta’s want to plan for their Son’s education. They are clueless about the cost as of now. However, they provide a rough estimate of spending 15 lakhs when he turns 18.
- Goal of an international vacation is on their minds. But this is not immediate and also low on priority.
- Mr. Mehta would also like to know how to plan his retirement considering he will be spending around 40,000 per month in current terms post retirement.
Good Moves of Mr. Mehta
- No liabilities
- Bought a Health Insurance Plan
- Saving and investing
Bad Moves of Mr. Mehta
- No life Insurance
- Goal Priority not set right
- Inadequate Emergency fund
- First Thing first, we see here Mr. Mehta doesn’t have a designated emergency fund to fall back on in case of any emergency. Thus it is suggested that his first priority should be to create an emergency fund. Ideally, he should have atleast 6 months of his monthly expenses as a contingency fund which comes to 4,20,000 (70,000*6). He already has 85,000 in liquid fund, the balance he needs to create. He can do this by doing a monthly SIP of Rs.12000 in a combination of liquid fund and short term fund. Mr. Mehta should continue this till he achieves his target. Any windfall should also be part of this to achieve this fast.
- Secondly, Mr. Mehta should ask the HR of his company about details of the coverage provided by employer. Having knowledge of what benefits you have is of utmost importance. Although, it is not suggested to solely depend on the health coverage provided by the employer. Mr. Mehta has done a great job in taking a separate health insurance policy to protect his family. It is further suggested to invest in a critical illness plan for him and his wife. It will cost only around 1000 on a monthly basis.
- Life insurance is crucial for Mr. Mehta as he has 2 dependants –his spouse and his son. It is strongly recommended that he invest in a Term plan of around 1.5 crores to adequately insure his family. The term plan is cost effective and best way to provide ideal protection for your loved ones. A term plan for his age will cost him approximately 1250/- on a monthly basis.
- Buying a house immediately is not feasible as it will be only possible by selling his existing house and taking a huge loan of approx. 1 crore which is not feasible at the moment. His priority should be to start creating a corpus for retirement and son’s education.
- His existing equity investments i.e. Equity Mutual fund and direct equity should be mapped to the goal of Son’s education. Additionally, an SIP of Rs.5000 in an equity mutual fund should start on an immediate basis. As this is a long term goal, starting early will reward Mr. Mehta with a power of compounding.
- Retirement planning is an unavoidable goal. Mr. Mehta should know that he would require a corpus of around Rs. 3.5 crores at the age of 60 to maintain the same standard of living that he can maintain today in 40,000 per month. In order to achieve this, he can map his PPF & EPF investments and start an SIP of Rs. 8500 in an Equity mutual fund. As this goal is 25 years away, equity mutual fund will be the optimum investment avenue.
- It is further suggested that once the emergency fund is in place, the same amount of 12000 should be redirected towards creating a corpus for house in a debt or balanced mutual fund depending upon review. This goal can be revisited after 1 or 2 years.
- Mrs. Mehta can also start saving some amount from her growing baking business in Gold ETF to have some exposure to gold.
Taking all these steps will make sure that the Mehta and family is on the right track to achieve their goals. It is important to note that financial planning is not a one time activity and it needs to be reviewed annually. I hope you got some clarity as to how you can do your own financial planning. Alternatively, you can get in touch with a financial planner who will guide you in this whole process.
Financial planning is an important task in the management of your finances. It is not just limited to the norm of planning the strategies and ways to invest your money into the various business ventures or funds or insurance schemes by various companies, but it also includes the planning to put every single penny of your income and savings into something very beneficial. A financial planner is the best person who can help you to learn more about the market and the new schemes that are being launched in the market with the pros and cons of each one of them.
Financial planning is not much of a difficult task and every individual can do it easily by just putting their time in studying the basics of the finances, taxation system, accounts and much more. An individual having a single and easy source of income can plan his or her finances very easily and the individual can also learn to invest the savings by him or herself. But when the sources of income are multiple and complex then you may need a financial planner.
This is where an individual lack from the professional financial planning experts
There might be some chances that you may miss out some of the details from your finances or you try to figure out the finances successfully and invest them in the best schemes in the market with lots of benefits included in them, but you may forget to include various life events that may create some hindrance in your full proof financial plan. This is where you will need a financial planner. There are various life events that occur in an individual’s life which can unbalance the whole financial status of the person and can also be the reason for the changes in the financial plan created earlier. A financial planner takes everything into account beforehand and he knows what all life events would be affecting the financial planning majorly.
Here are some of the major life events in an individual’s life which require financial planning
If you wish to purchase a home for yourself and your family.
Nothing is better than home and when you get a great deal for the house, it almost becomes irresistible. This is the point of time in your life where you are already investing into various schemes and policies and cannot have a debt on your shoulders but with proper financial planning the task can be made easier and you can purchase your dream home with a slight modifications in your previous financial plans.
You get a big raise in your work-place.
This is a cause for celebration and you may think of trying to use that money for a better living standard and style, but you should consider using that big raise instead in some savings and investment schemes. If you are already having few schemes then you can increase the premium for those schemes which will benefit you in the future years.
Weddings are a major life event in everyone’s life.
Marriages not just mean the welcoming of a life partner but also welcoming the financial plans and problems of your partner. The finances can get complicated if both the partners are having their individual financial plans. The couple needs to sit and discuss a common financial plan for both so that the personal financial status is not disturbed as well as the finances of the house are maintained well.
You are about to have a baby.
The feeling of becoming a parent can be life changing but with the baby comes more and more responsibilities. The financial responsibilities of the baby increases as the baby start growing up. It is necessary for the couple to manage and plan their finances beforehand and to invest into various schemes that provide benefits on the birth, growth and maturity of the child.
If you and your family is relocating to some other place.
Financial planning is necessary whenever you are shifting home from one place to another. It is important because the taxation system, the expenditures, the lifestyle, etc in the other city will be different and now you have to plan your finances according to the place you are relocating.
Divorces from your spouse or death of any family member.
As depressing it sounds, it also has adverse effects on your finances. Whenever a member of your family dies or you get a divorce from your partner, there is a major change in your financial status and you must be well aware of the changes that you have to make in your financial plans. The financial planning is necessary in these life events as well though you are in the grief of losing your loved ones.
You are getting another job.
The change in the job can be affecting your finances majorly as the income of the individual may change and the whole financial planning has to be done once again.
It is the most pivotal point of anyone’s life. You should be planning well enough from your early days of working so that you can gain enough money to lead a happy and merrier old age life.
Financial planning is important and it is even more important to keep on reviewing based on above discussed life events to make sure you are on the right track to achieve your financial goals.
Financial planning is relevant as well as vital for all the age groups. So, whether you hire a professional to do it for you or you prefer to do it yourself, we are giving you the tips for financial planning for every generation. This will either help you talk to your financial planner or will help you determine the investment strategy if you are going to do it yourselves.
The ones in their prime – young adults in the age group of 25-40 years
This is the young generation or generation X, which has started off the career recently or are just stepping up the ladders of their career. This is the phase, where these young individuals have started earning and there are new responsibilities like marriage, kids etc.
Budgeting includes estimated income and expenses which would include short term, long term and medium term financial decisions. It is always better to identify the nature (short, medium, long term) of expenses and adjust them against your income.
Start early to save
When you start saving at much early age, it grows up to be much bigger corpus in the long run. Compounding effect is the factor which will increase your corpus if there are more years to earn, even if rate of return is lower on such instruments.
Invest in equity and related instruments
Equity exposure yields superior returns over and above the average returns earned by conventional financial instruments like bank Fixed deposit etc. This is what makes equity investment attractive and hence at this age group, it is better to have equity exposure at about 60-70% to reap extraordinary returns.
Restructure your debt
If you are thinking of house purchase as a medium term or long term objective, then it is implied that you are going to borrow for the same. Clear and higher credit score will ensure smoother loan processing for such loans. Such credit score can be achieved through timely repayment of interest and principal.
Ideally, you should maintain 3 months cash balance as your cash buffer for any emergency situation. This emergency fund should be only released in case of sudden job cut or unforeseen event like accident, etc.
Invest in tax saving instruments in such a way that your tax deduction limit is exhausted, but not more than that. This will ensure optimal tax position and will also ensure that you have invested a minimum of the threshold.
The ones in the saturated phase –adults in the age group of 40-55 years
This age group is well settled and battling with rising expenditure but also with golden line of increasing salaries. This phase also features bigger decisions like house purchase, school and college expenditure etc.
If not done yet, you must take a life insurance for securing your family’s financial worries, even when you are not there. You should also take health insurance as your health care expenditure will escalate with the age and so will the premiums for the health insurance.
This is the most important long term goal which will be a medium term goal now. You should divert more and more resources towards retirement portfolio, once you meet with your necessary expenditure.
Get rid of loans
If you can afford, it is better to pay off the personal loans, which do not result in any asset creation or wealth building. This will enhance the liquidity position which may be very important at this age to meet with any unexpected situation.
Save first and then spend
This is the age where you should save more to accumulate more for your retirement portfolio or kid’s education portfolio.
For those in the higher tax brackets need to manage their tax positions well enough to manage exempt incomes and tax free incomes. This will enhance your effective rate of return on any investment.
The wise ones – Senior citizens in the age group above 55 years
The individuals in this age group have mostly completed their service or are about to complete their term. This is the period where individuals need post retirement income and will be dependent on such income stream as there is no employment income.
You should maintain a cash buffer for accommodating the contingent expenditure, especially health care expenses. This is very important as liquidity is important factor at this age.
Allocate your income stream appropriately
Your pension or annuity should be applied to appropriate purposes, like necessities (survival expenses). If you spend on unnecessary things, the you will be left with no money to spend on necessary things.
It is better to have a WILL for the possessions to distribute them to your loved ones. This will ensure appropriate distribution of your inheritance and the surviving spouse will be left to no one’s mercy, if you plan accordingly.
Financial Planning differs at every stage of life and hence is different for every generation. We have summed up important points for every such age group which will provide a basis for the financial management.
The coronavirus has spread like a fire globally. This pandemic has taught us not one but many lessons. As it is always said, any experience teaches you some lessons. It is up to us whether we understand it or just ignore it. In this blog, we will focus on the financial lessons we learned regarding our personal finances from this deadly virus – COVID19.
The pandemic has also dealt a huge blow to the world economy and looking at how things are moving currently, the chances of all this going away anytime soon are only getting bleaker.
While nobody really knows how long this will last or how much we will be affected, there are a few financial lessons that we have already learned so far. Let us discuss these in detail:
1. Do not depend on single source of income
Having your entire family depend on your single source of salary/business income has proved to be a big mistake. I have come across so many people who have lost their jobs having 4-5 dependents.
It is highly suggested that you should have multiple sources of income. But the question you may have now is “How?”.
Well, try to make your hobby lucrative. For example, you play guitar, you can teach students on weekends. Alternatively, if you are an experienced professional, you can start providing online coaching to people in your industry who need to upgrade themselves. You can teach them how to do business or any area in which you have expertise.
Another way is to have passive income by way of dividends, interest and rentals. For this, you need to plan in advance so that you have multiple sources of income. So even though one of the income sources ends or becomes less you have others to fall back on to move on for some months.
So the lesson learnt is to generate income from multiple sources.
Read here: Financial Planning amid COVID-19
2. Do not go overboard with loans
Many households have experienced a grave cash crunch in this COVID situation. This is major because most of their incomes were going towards paying EMIs. As long as you are getting your monthly income, it is manageable to pay off your loans. But looking at the current situation where we are experiencing job loss or significant pay cuts, it is difficult to continue with all the loans.
Although taking a loan enables you to experience a lavish lifestyle like owning a big house, a sedan car, top model mobile phone, luxury shopping of clothes using credit cards etc, it is crucial that you understand we should only be spending what we have and should not expand our lifestyle beyond what we can afford at that moment.
Loans can really help you out in need and it should be taken only when there is no other option left. Ideally one should not have EMIs exceeding 30% of your income.
Ones who have lost their job or witnessed massive pay cuts have no other option but to either sell the asset or make use of the moratorium period provided by RBI. But opting for a moratorium will only add to your liabilities as your interest will increase. Instead of saving money, you will end up paying more.
So the lesson learnt is don’t go overboard with loans ever. Limit it to 30% of your in-hand income even though you are eligible for 50% or more.
3. Always have an emergency fund ready
We understand the importance of having an emergency fund in time like this. Are you thinking that if you would have saved for emergencies, instead of spending on less important things then you would have been a lot better off dealing with the current COVID-19 pandemic?
If yes, this is the lesson learnt for you.
It is never too late. The first investment should always be to create an emergency fund. Once you are done saving and investing for your emergency fund, then you can look at investing for your other goals whether short term or long term.
Having an emergency fund is a great way to meet all your liquid needs. So start building it before it is too late. Now you might be wondering. “how much should we target to have in an emergency fund?
I will give you a thumb rule here. Ideally, one should have an emergency fund equal to 6-12 months of your expenses. It varies depending upon no. of dependants, no. of sources of income, nature of work etc.
So the financial lesson learned is to have an adequate emergency fund at all times. You will never know when it can prove to be useful. Usually, it is when you least expect it.
4. Should not depend solely on employer’s health Insurance
Let me tell you one incidence here. Mr. Sahil, age 29 had a health insurance cover provided by his employer. This cover not only covered him but also his parents. So in case, any need arises, he could utilise this benefit provided by the employer. Even after suggesting multiple times that he should take a separate cover for himself and his parents, he just kept on postponing the same thinking that he already has a cover so why to spend more.
Now during this lockdown owing to novel COVID-19, he lost his job. To make the situation even worse, his mother tested COVID-19 positive. Sahil who once thought that he is adequately insured was looking out for other means of funding the medical expenses as now he has no job and no health insurance cover too.
It made him realise the importance of having a separate health insurance cover. But he learnt this lesson the hard way. I feel that many of you could relate to this story of Sahil.
So the lesson learnt is don’t make the same mistake and get yourself adequately insured.
These were some of the financial lessons that we learnt from the current COVID-19 pandemic. It is highly recommended that you learn these financial lessons and take action so that the same thing doesn’t get repeated any time in the future. It is rightly said that “Tough times don’t last, but tough people do.” In times such as these, let us try our best to keep ourselves optimistic and positive. This too shall pass.
In the recent market situation when the Sensex was down by approximately 30-35% in a month’s time during the Feb –March 2020, many of us felt uncomfortable looking at the negative returns. The Sensex fell from around 40,000 marks to a steep low level of around 26000. Now the market has already recovered partially and is at a level of 33,000. But this entire situation of volatility in the equity markets has given you an opportunity to think about your own risk profiling. Are you behaving in the same manner as you must have conveyed to your financial planner when he/she may have discussed your risk profile?
Try to recollect and think about it for a while.
Before digging in deep into this, let’s start from the basics.
What is risk?
When we invest in the market, there is a possibility to get returns as per our expectation or below our expectation. This means we can either gain from this investment or lose some or all of the original investment. This outcome is not guaranteed beforehand and depends on various fundamental and technical aspects. This uncertainty of not knowing the result beforehand is called Risk.
However, risk is not always bad and there is no need to avoid it completely. A basic idea in personal finance is the relationship between risk and return. The greater the amount of risk an investor is willing to take, the greater the potential return. So in order to grow your wealth, some risk needs to be taken.
For e.g. The safest investment considered is government bonds when compared to riskier assets such as equity. Simple Funda – Low risk – Low return, High Risk – High return
Now let us discuss it in more detail:-
There are typically three types of risk profile on a broader level. These are:
Before advising anything to you on your financial investment decisions, an informed financial planner will always first try to understand your risk profile. The planner would want to know what is your risk profile out of the above three to provide you with suitable recommendations.
How is your risk profile ascertained?
Like I mentioned before, your financial planner must have discussed your risk profile before making any recommendations. This is usually done based on the following parameters: –
1. Age Factor – If a person is very young, he can take more risk compared to a person near his retirement. Therefore, we can say that your risk-taking capacity reduces as you age.
2. Income Level – People with high incomes can afford to take more risk compared to low-income groups.
3. No. of dependants – If you have more number of dependents, then you should ideally be not making riskier investments.
4. Nature of Past investments – This helps to understand the mentality of a person in dealing with risk. If a person has invested a major part of his portfolio in equities, it gives an idea that this person is aggressive. On the other hand, if a person has only invested into fixed deposits and traditional life insurance policies, then we can clearly say that the person is conservative.
5. Some behavioural questions – Most of the financial advisors provide you with a well-thought questionnaire to check how you will react in some of the different market situations. This gives your financial advisor an idea about your relationship with risk.
Based on the above your risk profile is ascertained. If in 5th point you would have mentioned that you will not sell your investments even if you see a loss or negative returns but you have done it now in the current market situation. It means you need to redo this activity of finding out your true risk profile.
Risk profiling is a process that professional financial planners use to determine the optimum level of investment risk for investors. Risk profiling helps to identify a client’s level of required risk; their risk capacity and; their tolerance towards risk.
All these 3 concepts might look the same but they are not. Let’s see how –
This means the level of risk required to be taken on investments to achieve the desired level of investment return. So if you are not ready to take that much risk in that case it will be difficult to achieve your goals. This is because by taking additional risk, you open the chances of getting higher returns in the long run.
This refers to the level of investment risk or losses that a client could afford to take to achieve their goals. This is usually ascertained by their age, income or tenure of the goal.
This is the level of risk a client is comfortable taking to achieve their goals. . It is a psychological measure. It refers to how emotionally comfortable a person is with taking risks.
There is often a mismatch between risk required, capacity and tolerance. It is therefore important to understand the thin line between all three.
An individual’s risk profile will affect the overall decision-making strategy and process. A risk profile is important for determining proper asset allocation in regards to an investment portfolio. By assessing how comfortable you are with investment ups and downs, you can make sure you don’t panic later when a risk is realised. It is therefore very crucial to invest as per your risk profile.