How Much Value Can You Give A 2 Year Old Financial Planning to Meet Your Future Goals

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Financial Planning to Meet Your Future Goals

All of us do a little bit of planning to manage our income, savings, expenses, future liabilities (money we expect to spend in the future), whether we understand anything about financial planning or not. While we are doing well so far, it may not be the best way to do it or give us the best results. Although financial planning may sound technical, it simply means recognizing your future income and liabilities today, writing down your current income and expenses, and seeing if there is a gap between what you will need in the future and what you can achieve with current resources and then plan your savings and investments to overcome this shortfall.

List of current income and expenses:

Start with your current income, which should include your salary, the salary of other working family members, any other income such as rent, business income, etc. Add it all up and don’t forget to deduct the taxes you pay on each income as well. to finally arrive at your family’s net income at present.

After arriving at your family’s net income, deduct all expenses like household expenses for the year, school fees, loan EMIs or any other short-term liabilities (expected within the next 3-5 years) that you anticipate such as home renovation or medical treatment etc. After this deduction you now get the savings that you have and need to invest wisely in the future.

Setting future life goals

The next step in financial planning should be to write down all your future financial obligations, when they will be incurred, how much you will need, etc.

Objective 1: For example, if you are 40 years old and you expect your daughter to have a university education in the next 8 years and you assume that it may cost around 30 million, will you have the money to finance it? Decide on the investment and amount you need to make today to achieve this goal 8 years later.

Objective 2: Similarly, if you intend to retire at 60, you need say 100,000 hours to maintain your current lifestyle, which is worth INR 50,000 today. Given the advancements in healthcare, you can easily expect a 25-30 year long retirement life. The money you need for retirement can be funded by a long-term, low-risk investment (such as debt mutual funds, pension plans) made today. Set aside some money for such an investment to be made today.

Objective 3: You can set aside money to buy some health insurance that you will need during the retirement phase or even earlier. Insurance premiums need to be financed from your current savings.

The goal setting process helps to understand your future requirements, quantify them and invest in the right asset class to fund each of the goals as they become due.

Asset allocation:

While asset allocation can be done along with goal setting, it is better to understand how asset allocation can affect the success of your financial plan. You can invest your savings in various asset classes like shares, debt, gold, real estate etc. See the investments you have already made like if you own a PPF or EPF account, money you have invested in bank FDs, home loans , which you are paid, etc. From the current savings and investments you have already made, calculate the percentage allocation made to each asset class. For example, all bank FDs, PF amounts, government bonds, debt oriented pension plans should be classified as debt. Any money invested in IPOs, company shares, equity mutual funds should be classified as shares, loan EMIs should be classified as real estate etc.

Generally, 100 minus your current age should be allocated to stocks and stock-like products. If you are in your 40s, 60% of your annual savings should be invested in equity-like products and the balance in debt products. If your current investments do not reflect this, try balancing your investments by reducing the money you have put in debt products like FDs and bonds and divert that money to equity mutual funds or stocks.

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

Start early

You need to start your financial planning early because it will give you the advantage of compounding example no matter which option you choose to invest in, your money will grow over a longer period of time and the returns will increase every year.

Annual review and rebalancing

While a good financial plan is a good starting point, it is very important to follow it with discipline and rebalance your portfolio every year. Because life circumstances often change, you need to review your plan with your financial advisor and make changes to reflect your new circumstances.

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