EVERY individual has certain goals to be achieved during one's lifetime, but may not have a roadmap for the same. Enumerated below are ten thumb rules that can propel an individual on the path of financial planning. As understood, a thumb rule is applicable only broadly and is guidance. An individual may approach a certified financial planner practitioner, who critically analyses a client's financial situation before recommending and delivering a financial plan.
Define and set financial goals: The most significant thing before starting financial planning is to jot down realistic financial goals that one wishes to achieve. Such goals may include buying a house, purchasing a car, funding children's education and marriage expenses and retirement with specific considerations. Such decisions should be taken after detailed discussion with the family.
List down all cash inflows and their usage: One should note down all sources of cash flow, which can be routed towards investment after meeting regular expenses. If each rupee in our account is identified for either consumption or investment, a financial discipline comes into place. For instance, a bonus amount received of Rs 200,000 may get bifurcated into investment of Rs 150,000 and the balance Rs 50,000 towards lifestyle expenses.
Plug cash leakages and control discretionary expenses: One must understand clearly the distinction between one's the distinction between one's needs and wants and be ready to forego wants when the expenditure exceeds budget limits. Disciplined investments should ideally be prioritised over expenses to reduce discretionary spending and lifestyle expenses.
Channelise savings to appropriate investment vehicles: Systematic goalbased investing keeps one on track to achieve one's goals. It also takes care of investing in an asset allocation proportionate with one's risk profile. Choose investment vehicles that offer inflation beating returns in the long run in order to build wealth. Ideally one must invest at least 30 per cent of their net average monthly income.
Create sufficient emergency or liquid fund: Create an emergency fund equivalent to three to six months of your expenses for meeting temporary contingency. The estimation of monthly expenditure should include all regular and necessary expenses.
Repay unproductive debt: Debt is not a burden if managed efficiently and well within one's repaying capacity. Ideally, one's total debt liability should not exceed 30-35 per cent of net monthly income and may be extended up to 40 per cent in case of buying a house on loan. A debt taken for asset creation such as buying a house is always preferable over the one for discretionary consumption.
An indicator of productive asset is its capacity for capital appreciation and income generation.
Secure assets and financial liabilities with insurance cover: One's with insurance cover: One's property and other assets should be insured to the extent of costs involved in their reinstatement to current state. Financial liabilities including outstanding loans should be covered by life insurance.
Make all financial transactions tax efficient: Tax efficiency should be an important consideration while selecting a particular investment instrument as well as making other financial transactions. Do not save just to avoid paying taxes.
For example, investing in 80C approved payments or deposits primarily to save tax.
Start early for a sufficient retirement corpus: One must start investing for retirement early in life to benefit from the power of compounding. If a person desires to have a corpus of Rs 1 crore on retirement at the age of 60 assuming a return of 8 per cent per annum on investment, a person starting at 30 is required to invest approximately Rs 7,000 per month. In case investment starts from the age of 35 or 40, then investment monthly increases to Rs 11,000 and Rs 17,500, respectively.
Ensure a succession plan for all assets: To enable smooth transition of assets to dependants, one should have a valid will.
This enables hassle free access and right to all physical and financial assets to one's dependants after death.
One can reasonably conclude that ideally one-third of the income of an individual should go towards meeting household expenses, the other one-third towards servicing of loans and the balance one third towards various investments in accordance with short-term and long-term goals including retirement.
Depending on individual circumstances more funds may flow from debt servicing towards investment.
