8 Things You Must Know About Financial Planning
Through financial planning, one can build a budget plan curated to suit one’s requirements and goals, keeping in mind the present and future needs. The pandemic induced lockdown and the associated uncertainty has left most of the youth grappling with financial distress. In such trying times, the importance of having a suitable savings plan and other financial moats cannot be stressed enough.
Let’s first understand what exactly is financial planning and how it can help to secure your future.
What is financial planning?
Financial planning can be considered as a roadmap; constructed to achieve your financial goals. It is a systematic process that involves budgeting, selecting assets, investing in the right ones, setting goals, constructing a retirement plan and so on. A good financial plan helps you build a contingency fund to take care of any unforeseen needs that could arise, along with an allocation of funds for meeting expected expenditures.
Most of the savings plans in India include people using low-risk savings in insurance plans and fixed deposits as a form of investment rather than high-risk tools. While for some it is a personal choice based on their financial goals, for many average investors it indicates their risk-averse nature and the inability to diversify the portfolio without the basic knowledge of financial planning.
Thus, personal financial planning assumes great importance here.
Why do you need financial planning?
In today’s world of consumerism, most of you face trouble trying to manage your income and expenses as you end up with little to no money in your bank accounts within days of your salaries being credited. Besides, the need to lead a comfortable lifestyle and securing the dreams and aspirations of your family push you to take up loans and spend extravagantly today without realising how badly it affects your future financial health.
You can easily align your financial needs through basic financial planning to give form and shape to your goals without worrying about debts and other liabilities.
What are the things you should know about financial planning?
Now that it has been established that it is important to have a good personal financial plan, here are eight essential things that will help to keep your finances on track.
List your financial goals: The first and foremost step in financial planning involves: listing down your goals based on specific periods - short term, medium term and long term. Further, the goals should be specific, measurable and adjustable. Determining your ambition makes it easier to pick the correct investment products.
Plan your budget: To see that your salary is spent suitably, you can formulate a spending chart to allocate some percentage of your income for each expected expenditure. You can begin by studying how your monthly expenses are incurred in rent, utilities, groceries, loan repayment, insurance premiums, education, recreational activities and so on. Never forget to keep aside funds to meet emergency needs.
Assess your debt: An important aspect of creating a good personal financial plan is to assess your debt liabilities and eliminate them. Debt elimination should be prioritised to avoid falling into a debt trap and clear off the debt as quickly as possible. It will clear the road to allocate your money for other needs.
Choose the appropriate investment asset: Proper asset allocation is considered the foundation of a good financial plan. To choose the right mix of assets, you must assess your risk appetite, i.e., the ability to bear losses in cases of market volatility. Accordingly, you can choose the right product mix to achieve your financial goals, as listed earlier.
Insure your family: Saving in insurance is crucial to protect and secure your family’s financial future. Ideally, it is recommended to go for life insurance that is 8 - 10 times your annual income. Based on the family size, the number of dependants and their goals, and wealth, insurance coverage may differ. Usually, a term insurance plan is recommended as it is cost-effective and comes with lower amounts in premiums and high protection.
Be aware of your credit liabilities: In today’s fast-moving world, credit usage has increased tremendously. Therefore, it is necessary to use it accordingly and pay off existing loans and credit bills on time lest you fall into a debt trap that ruins your financial plans.
Save for your retirement fund: To have a comfortable post-retirement life is the primary financial goal. It requires cultivating a saving habit to prepare for future uncertainties without fear and ensure a steady flow of income during old age.
One way to ensure this would be to invest in Tata AIA online insurance plans, such as guaranteed income and annuity pension plans. These plans offer attractive investment choices and assured returns and are viable for retirement planning. The investments also receive a tax* benefit under Section 80C of the income tax laws. The savings plans payouts also enjoy tax* exemption under Section 10(10D) when the policy matures.
Revise your financial plan: A financial plan should be flexible as per changing circumstances. Unforeseen events such as death and accidents can affect the course of your life. Thus, reviewing your plan will help to assess if you are set on the right path, or you need to re-prioritise your goals. Note that the plan should support you with each crucial step of your life.
It is never too early to start financial planning. The simple way to begin is to follow the golden rule: spend wisely, save and invest. Intelligent spending and curbing unnecessary expenditures are the key to a healthy financial plan. No matter how big or widely spread your financial goals are, the right time to start planning is now.