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Basics of Financial Planning

This is a 2 part series on basics of Financial Planning that i wrote for Industrial Economist recently.

Financial Planning – A beginner’s guide:

 

Financial Planning is an active approach to taking charge of one’s future and plan for the same. Investors usually fret about market volatility, and  make piecemeal investment decisions. After some time they lose track of what they have done till  now and whether it is helpful for their future.

 

Destination : The Goal

 

Financial Planning starts with setting a destination ie a goal of what we want to achieve this could be a short term goal that you would like to achieve in next 1 – 5 years or long term like retirement after 20 years. These should be written on paper with the estimated cost for the goals today and should ideally be placed where you can see it.

 

Starting Point : Where are you now?

 

Now its time to see where we are financially. List your assets and liabilities also track your income and expenses so that you get a picture of your assets + monthly savings that you can set aside for your goals. Ensure that you track your income and expenses in  budeget sheet or diary or an online budgeting software so that you can see where the money is going. Most of us are likely not to have a great picture here as far as budgeting is concerned but that is not an issue. Taking up financial planning will improve your picture going forward.

 

Budgeting is an exercise that many would prefer not to do but it needs to be done and with the technology available today there are many free applications to download and use on your PC or mobile or cloud applications that will help you budget.  Usually by cutting small expense like eating out 2 times a week instead of say 3 times or going to one movie per month etc many save couple of thou sands that they did not know existed before.

 

The Road : Avoiding traffic jams.

 

These are the inevitable lemons that life would throw at us now and then. These are unplanned eventualities like Illness, recessions, having to buy a new car etc. While these are inevitable they are not hopeless situations and we can minimize the impact:

 

  1. Control Debt : Ensure that borrowing is the last option, while borrowing for a house is fine as you save on rent and get tax benefits plus the security of having an asset that is your own, taking loans to buy gadgets is a bad idea. So is overextending on the home loan many people end up costlier house then what they can afford to pay for mortgage. This makes what is supposed be the peaceful life of living in one’s own house into a nightmare of EMI payment.
  2. Insurance : All liabilities like Home Loans, Education loans need to be covered with a Term insurance  plan so that in case of any eventuality the family does not have to sell the house or be unable to pay.  Beyond this adequate insurance needs to be taken so that family does not suffer for anything and same lifestyle as today is maintained.  Term Life Insurance cost is very low and has to be compulsorily taken, the cost will usually be less than what one spends on mobile bill every month. Health Insurance is also a must for your family so that the entire familys health is covered to a large extent.
  3.  Noah didn’t start building an ark after it started raining: Saving for a rainy day is understood by everyo ne what needs to be done is to save for say 6 months family expenses including all EMIs etc and keep the money separately. This will help in any emergency and help us face the emergency without panicking. Though 6 months expense may look big at first, we can start with 15 days  to one month of expense and work upwards. This is a mini goal by itself and many people feel the mastery over their financial future once they attain this.

 

 

Next week we will start the trip of financial planning and look at the major goals

 

You can view the article here : http://www.industrialeconomist.com/December%202011/36.html

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