How many of you want a dream home, a comfortable retired life, a big car etc. in your life? I think most of the people say yes and at the same time they ask a question can I do all this in my lifetime. Here is coming financial planning. You cannot achieve a goal without a planning. A proper well-articulated plan may bring you the targeted wealth. While planning we should not forget about the implementation of the plan also. In this article, we will concentrate on planning part only.
What is Financial Planning?
Financial planning is the first step towards achieving financial goals. It is the step by which you will decide how to manage your money. You have to decide how much you will spend and save. Allocation of the asset is also a part of the financial planning.
Steps of Financial Planning:
I have followed the below steps and you can also follow the same for your planning:
Step1: Set your Goal – First step of financial planning is to set your goal. Some of the typical goals are funds for retirement, down payment of home and car, Child’s education etc. Write down the estimated money required to achieve the goal and the time by which you have to achieve the goal.
Step2: Prioritize the goal: Goals are of two types- Long term goal and Short term goal. Long term goals have more time, generally, more than five years to achieve and short term goal have less time to achieve. You have to discriminate the goals and prioritize over that. Suppose, down payment of home is more important than a car. Hence, you need to start saving for home right away whereas you can wait for a car for another two to three years may be.
Step-3: Asset Allocation: According to the time to achieve the goal fix your investment vehicle i.e. equity or debt. If you have long term goal such as child’s education you can save in equity. For short term goals, you need to take the debt route. According to the route, you calculate the requirement of monthly saving. As I have maximum long term goals, the allocation to equity is proportionate to that goal.
Why is Financial Planning Important?
I have witnessed many of my friends and colleagues that they are busy in paying EMI. The EMI is for home, car and personal loan. Even, somebody has the EMI of various consumer durables such as an Air Conditioner, smart TV etc. A large chunk of the monthly salary is washed out in paying EMIs. And the saving has become very difficult for them. If you are not planning properly from the very beginning, you can also be in the same soup. Always buy what is required. If you are a bachelor there is no need to pay EMI of a full house. If you are driving your car only for the weekends, then get rid of it.
If you don’t plan properly, you may not achieve the financial goals. You will have to travel a bumpy ride if you start your journey late towards the goal. Suppose you are 30 years old and the retirement is another 30 years away which need Rs 1 Cr at that time. You have to save Rs 5000 per month considering 10% return annually. Now, you think that there is so much time in hand to retire so why should I think of my retirement so early. Let me enjoy my money and after 5 years I will start saving for retirement. You have to save Rs 8000 per month to save the same amount i.e. Rs 1 Cr at the age of 60 years.
You have to save Rs 3000 more every month for 25 years at the cost of Rs 5000 for 5 years.
As Warren Buffet rightly said that don’t save after spending, rather you spend after the savings. You have to be disciplined enough to inculcate the habit of regular saving. Automate all your savings with ECS in banks or add to your bill pay in net banking. The money will be debited from your account and the leftover will remain for your spending. And needless to mention that I follow these tricks.
From the above, it is easily understood that a sound financial planning is of utmost importance for achieving financial goals. The following of plans is much tougher than the planning. You have to be careful enough for your expenses. Prepare a budget for regular expenses and try to be within the budget. Download an expense tracker app and track the expenses and set the limit. Automate all your investments. By this way you can achieve your financial goal easily.
Disclaimer: The opinions expressed in this blog are the author’s own and do not reflect the views of Paisabazaar.com. Paisabazaar.com does not assume any responsibility or liability for the same.