5 Points For Effective Financial Planning
Business
- On Feb 19, 2025
- By Avinash Kumar
5 Points For Effective Financial Planning
I would like to ask you, what you really think about yourself when you choose an investment option for you before investing. Do you think, you are a lion, who can fight with every situation or a Fox who is so sharp to take decision according to the situation? Yes, you are, but only in your profession and in your personal life but due to your tight schedule in office, due to fighting day-to-day challenges you normally ignore the importance of your Financial Planning. Normally people follow whatever comes on internet like “Top performing funds” or “Best MF house” or your colleague has invested in some funds, or “he made money by buying and selling of some stock” or some people were saying something about some instruments” isn’t it?, But have you gone deep into any fund to understand, what exactly it says? Have you ever discussed or tried to understand what your risk profile is? What are your Needs and wants? And why this fund is on top in terms of return? Above all are secondary but very first you have to understand yourself first like,
1. Your Net-worth,
2. Your Risk Appetite,
3. Your Liabilities and Responsibilities,
4. Your Life Goals,
5. Your time horizon to stay invested and the amount you need to fulfill your responsibilities.
I think “NO”. Let’s understand some points before we start investing.
MY NET WORTH IS FINANCIAL ASSET (FA)-FINANCIAL LIABILITIES (FL)?
It means your financial wellbeing. How quickly you can come out of any crisis if it appears before you. How much is the valuation of your financial Assets. Financial Assets are those assets, which can be liquidated whenever you are in need. I suggest not counting your real estate assets, reason is liquidation, and you cannot liquidate it if you need money in case of emergency. The part of Financial Assets that can be quickly liquidated are Equity Stocks, Equity Mutual Funds, Ulips, Debt funds, FD, Liquid Funds, SB and Current Bank a/c etc.) Financial Liabilities are all your loan taken. Simple way to calculate your financial assets is Assets minus Liabilities. You should know your Liability before you invest somewhere.
WHAT ARE MY FINANCIAL GOALS?
It can be yours Children Education, their Marriage, your Retirement Planning, Buying a New Car or a big House, Planning for a Domestic or Foreign Holiday, Donation, Charity or something else. All these can divided into 3-time horizon i.e.:-
a. Short term goal ranges 0 to 3 years,
b. Medium Term goals ranges 3-5 year,
c. Long term goals ranges 5 or more year
After dividing them into a time frame you need to bifurcate these goals into NEEDs Based Goal Planning like Children Education Plan, Marriage Plan and your retirement Plan) and WANTs bases goals like want to buy a New House, Foreign or Domestic Vacation, Big Car etc. We need to give priority to NEEDs instead of satisfying your WANTs.
How much do we need and When?
After deciding over NEEDs and WANTs", we need to fix a period under which we would like to achieve them. We need to consider inflation first. Inflation is an important element and mostly we miss on it. What amount of inflation need to take for what purpose? Normally 6- 8% for your retirement and 8- 10% for children Education and Marriage. If your age 30 and your monthly expenses are 50000 p.m. and your retirement age is 60. Then your required amount of corpus is? Child education and Marriage table also need to consider the Inflation.
My risk taking capacity?
Normally people invest by seeing returns online of MF and advertisement MF Sahi Hai yes MF Sahi Hai, but in actual, people don’t know how much they can take risk, when we ask question if valuation goes down by 10 or 20% what they will do. They say I will not touch or invest more, but in actual they stop contributing or willing to withdraw the funds and say will start again, whenever the Market start moving up. Moreover, starts investing again when market is already up and some other one has tasted most of the juice. Therefore, you should understand your risk taking ability. Do not understand volatility as risk, in fact volatility is an opportunity to put some money when people are fearful; it is time to be greedy now. Spend some time with your Financial Planner and check what is your risk taking appetite and then listen him about where and how to invest.
Investment option
After knowing well your risk taking appetite, you need to draft a plan with your financial advisor according to your goal and time horizon. I.e. 0-3 year debt fund, FD, short-term debt fund, dynamic bond funds, Liquid funds. 3-5 year Hybrid category 5-7 year large cap fund 7-10 year Multicap fund 10 or more year- Small & Mid cap.