All of us do some 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 may be managing it well for now, it may not be the best way to do, or it may not give us the best results. While financial planning may sound technical, all it means is how do you recognize your future earnings and liabilities today, list down your current earnings and expenses, see if there is shortfall between what you'll need in the future and what can get to with current means and then plan your savings and investments to overcome that shortfall.
List Current Income & Expenses:
Start with your current income which should include your salary, salary of other working members in the family, any other income like rent, business income etc. Add it all up and remember to also deduct the taxes you'll pay on each of the income to finally arrive at the net income for your family at present.
After having arrived at your family's net income, deduct all expenses like household expenses for the year, tuition fees, loan EMI or any other short-term liabilities (expected within next 3-5yrs) you foresee like renovating the house or a medical treatment etc. Post this deduction, what you now get is the savings you have that you need to invest wisely for the future.
Setting Future Life Goals
The next step in financial planning should be putting down all your future financial liabilities, the time when they will arise, the amount you will need etc.
Goal 1: For instance, if you are a 40 yr old man and expect your daughter's college education to be due after another 8 yrs and anticipate this may cost around 30 lakhs then, will you have the money to finance it? Decide on an investment and the amount that you need to make today to achieve this goal 8 yrs later.
Goal 2: Similarly, if you intend to retire at 60 yrs, you need to say 1 lakh p.m to maintain your current lifestyle which is INR 50,000 in today's value. Given the advances in healthcare, you can easily expect a 25-30 year long retired life. The money you need to live your retired life can be funded by a long-term low risk investment (like debt mutual funds, pension plans) made today. Set aside some money for such an investment to be made today.
Goal 3: You may set aside money for buying some health insurance that you'll need during your retired phase or even earlier. The insurance premium needs to be funded from your current savings.
The goal setting process helps in understanding your future requirements, quantifying them, and making investments in the right asset class to fund each of the goals when they become due.
Asset Allocation:
While asset allocation can be done along with goal setting, it is better to understand how asset allocation can impact the success of your financial plan. Panugothu Pavan. Panugothu Pavan.
Article Source: http://EzineArticles.com/9928075
You must be logged in to post a comment.