All of us do some bit of planning to handle our revenue, savings, costs, future liabilities (cash we anticipate to commit inside the future) irrespective of whether we recognize something about financial planning or not. Even though we could be managing it properly for now, it might not be the most effective approach to do or it may not give us the top results. Even though financial planning might sound technical, all it signifies is how do you recognize your future earnings and liabilities nowadays, list down your current earnings and costs, see if there’s shortfall amongst what you’ll need to have in the future and what can get to with existing suggests then program your savings and investments to overcome that shortfall. Get a lot more details about Financial advice Oxfordshire
List Current Earnings & Expenditures:
Start with your present income which should include your salary, salary of other working members in the family, any other earnings like rent, business revenue etc. Add it all up and remember to also deduct the taxes you are going to pay on each of the revenue to finally arrive at the net revenue for your family at present.
After having arrived at your family’s net earnings, deduct all expenses like household costs for the year, tuition fees, loan EMIs 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 Targets
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 require etc.
Goal 1: For instance, if you are a 40 yr old man and count on 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 revenue to finance it? Decide on an investment and the amount that you require to make now to achieve this goal 8 yrs later.
Goal 2: Similarly, if you intend to retire at 60 yrs, you require say 1 lakh p.m to maintain your existing lifestyle which is INR 50,000 in today’s value. Given the advances in healthcare, you can easily count on a 25-30 year long retired life. The dollars you have to have to live your retired life can be funded by a long-term low risk investment (like debt mutual funds, pension plans) made these days. Set aside some income for such an investment to be made nowadays.
Goal 3: You may set aside revenue for buying some health insurance that you will will need during your retired phase or even earlier. The insurance premium needs to be funded from your existing 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 objectives when they become due.
Though asset allocation can be done along with goal setting, it is better to fully grasp how asset allocation can impact the success of your financial program. You can invest your savings in various asset classes like equity, debt, gold, real estate etc. Look at the investments you have already made like if you own a PPF or EPF account, funds you have invested in bank FDs, home loans you are paying etc. From the existing savings and investments, you have already made, calculate the percentage of allocation made to each asset class. For instance, all bank FDs, PF amounts, govt bonds, debt-oriented pension plans should be classified as debt. Any cash invested in IPOs, company stocks, equity mutual funds should be classified as equity, loan EMIs should be classified as real estate etc.
As a thumb rule, 100 minus your current age should be allocated to equities and equity like product. If you are 40 yrs old, 60% of annual savings should be invested in equity like products and the balance in debt products. If your current investments don’t seem to reflect this, try balancing your investments by reducing the money you put in debt products like FDs and bonds and divert that funds towards equity mutual funds or stocks.
Most people are not comfortable investing in stocks as it requires special research, constant monitoring and a lot of undue stress. Hence equity mutual funds are a better option since your cash is professionally managed by fund managers who do all the research on companies before investing and continuously monitor the performance of the fund by buying good stocks and selling underperforming stocks.
You must start your financial planning early because this will give you the advantage of compounding example whichever option you choose to invest in, your income will get to grow for longer duration with returns compounded every year.
Annual Review & Rebalancing
Though a sound financial program is a good starting point, following it with discipline and rebalancing your portfolio every year is very important. Since life circumstances change frequently, you must relook at your strategy along with your financial advisor and make changes to reflect your new circumstances.