Terms like financial planning and personal finance appear frequently in TV shows, newspapers, and magazines. Just about everyone is stressing on the need for financial planning. Exactly what is financial planning and how does it add value to your money and financial goals?
Financial planning means…
Financial planning is a process by which an individual, under the guidance of an expert, charts a roadmap to meet expected and unforeseen needs in life.
Who is a candidate for financial planning?
Anyone earning an income must have a concrete plan to spend the money in a productive manner. He must consider financial planning to set himself up for success in life.
First, set goals
This begins by making a list of the most relevant financial goals or objectives.
For instance, the individual may choose to set aside money towards:
Once he has listed the objectives, it will bring in a sense of responsibility and commitment. He will no longer be inclined to spend money like he used to, because now he has more important things to do with his money.
Second, prepare a plan for each goal
Next is to prepare a plan to achieve each goal listed down by the individual in the first step. This involves making calculations and putting down a number towards each goal, for instance Rs 10 lakhs towards child’s education five years later or Rs 25 lakhs towards down payment on the house you wish to buy ten years later. It is advisable to engage a competent financial planner at this stage to help with the calculations. Apart from the math, he will draft a suitable portfolio with recommended investments to put you on the path to achieving your goals.
Third, setting aside money
The individual must set aside money regularly towards these goals. This is best achieved through an automated investment plan where you invest a fixed amount at intervals (monthly/quarterly) in a unit-linked plan (ulip) or a mutual fund. These are better known as systematic investment plans or SIPs. They are light on the wallet and help investors benefit from rupee cost averaging, which reduces the purchase cost of the investment over time.
Fourth, get life insurance on priority
Getting a protection plan must rank among the more important priorities for an individual. Life insurance has a variety of options that makes it convenient for individuals to provide for the family’s financial security in their absence.
Fifth, get medical insurance
Just as important is to get medical insurance to provide for health-related emergencies. A health insurance plan when taken at an early age comes at affordable premium and covers a larger number of health conditions. As you age, premium rates start climbing and certain health conditions may get excluded from policy coverage.