Viral Doshi Chartered Accountant and Financial Planner

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On our nation's Independence Day, wish everyone achieve financial independence as early as possible.

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THE DOS AND DON’TS OF FINANCIAL PLANNING -

Financial planning is also one of the most important and central processes that can help you grow financially and move closer to your goals. Try and keep these dos and don’ts in mind -

1. Listing and prioritizing one’s goals -

Do - Make sure you list down each & every small and big goal you have in life. Not only to focus on the bigger goals but include the smaller and more achievable goals to your list as well, so that the journey ahead comes with more validation.

Don’t - One of the biggest mistakes many people make at this step of financial planning is to overlook the importance of correct prioritization of goals. Ensure that your list is well thought of when you pen it down for the first time.

2. Tracking expenses -

Do - Financial planning and tracking involve keeping a detailed account of your spending and expenses. Be extremely honest in this process. Count every expense that you incur.

Don’t - Don’t estimate vaguely, always go by the statistics. In the process of financial planning and budgeting, estimations play a major role. Also, do take note of any dues, pending loans, etc. that might hit your account in the coming months, to avoid inaccurate estimations.

3. Creating an emergency fund -

Do - Financial Planning will only work if everything goes according to the plan. One of the biggest things that can unexpectedly go wrong is extra spending due to an emergency. Which is why, it is advisable to always have an emergency fund to take care of any unforeseen situation.

Don’t - Don’t overlook your emergency fund options. Take medical insurance for instance, it will not only secure you of any medical emergency but will also come handy during retirement.

4. Retirement planning -

Do - An important factor to take into account in financial planning is retirement. If you plan and save wisely now, your post-retirement life will be tension free and financially stable.

Don’t- Do not delay planning for your retirement. Regardless of your age, it is never too early to start planning for retirement. In fact, the sooner you start, the more time you have on hand to save up!

5. Dealing with emotional and mental pressures -

Do - While noting down the list of goals you have and estimating your expenditure, also consider your happiness index that will roll along with it. Do keep in mind that finances are one of the leading reasons for anxiety and hence, it becomes imperative to also keep some achievable goals.

Don’t - Do not get emotional or anxious about your finances. Do not come up with a plan that is extremely difficult to follow and will only give returns in the long run.

6. Overspending and re-visiting the plan -

Do - Ideally, stick to the plan that you have come up with. In case, you ever feel that your current financial standing and goals no longer align with your plan, revisit the plan and amend it accordingly.

Don’t - Do not overspend. Stay within the brackets of spending that the plan allows. Your daily and monthly expenditure must be closely tracked so you do not end up spending more than you should.

To sum it up -

Financial planning remains one of the central processes to attain financial freedom. Accuracy and numbers can make or break your game, which is why it is important to be careful while devising a plan. It is also equally important to keep tracking, following, and revising the plan from time to time.

The Financial Planning Pyramid: Which Level Are You On?

What is the Financial Planning Pyramid?

The Pyramid is an approach to managing our personal finances. The basic rule of the pyramid is to start from the bottom and move up. The four levels of the pyramid are (starting from the bottom): protection, savings, wealth building and speculation.

Protection -

“Protection” forms the base of the Financial Planning pyramid, and therefore must form the base of any good Financial Plan. Put simply, protection involves “covering your bases” by taking out an adequate quantum of insurance coverage to safeguard yourself from the risk of your financial loss arising from damage to your assets or to your health.

Additionally, protection also encompasses having enough life cover in place to indemnify your dependents from the financial loss arising from the loss of your life.

Savings -

Once you’re done covering your bases, you can consider saving for your future goals. A well drafted Financial Plan should form the cornerstone of your goal based savings, as it would allow you to take a more holistic stance towards your financial goals, keeping your cash flows, liabilities, and goal priorities in mind.

Start making affordable, regular and disciplined savings towards your important life-goals such as purchasing a home, planning for your child’s education, or planning for your own comfortable retirement.

The quantum of savings need not be large – what’s important is that you make a start early on so that you give your funds the chance to compound over time and grow exponentially. For instance, did you know that a monthly saving of Rs 10,600 for 25 years (Rs 32 lakh overall) can grow to Rs 2 crore at a conservative 12 per cent annualized return? What’s more - delaying this savings plan by 5 years will reduce the final savings amount from Rs 2 crore to Rs 1 crore!

Wealth Building -

Having put your savings plans on autopilot, you should utilize windfall profits (such as year end bonuses, inheritances and business profits) by investing them in a diversified portfolio consisting of high quality asset classes such as blue-chip shares, real estate, long term track record mutual funds and bonds. Consider your unique profile and preferences before you invest for wealth creation. Your investments need to be in line with the asset allocation that best suits your risk appetite.

For example, if you are a conservative investor, you should probably have only 20 per cent of your investments in equities, 50 per cent in debt and fixed income products and the remainder in real estate and/ or gold. A more aggressive investor may have a different asset allocation altogether. Younger investors should ideally adopt more aggressive stances towards their portfolios, even if their risk tolerance levels are low.

Speculation -

As the term suggests, speculation is basically no different from betting or gambling! An example of speculation would be trading in shares with the intent of selling them in a week or two, or making speculative, leveraged trades into futures and options with a short-term horizon.

Though speculation may lead to washout losses or windfall profits, one need not avoid it altogether - it is, after all, the only really exciting aspect of Financial Planning! It is advisable, though, to speculate last of all (after taking care of your protection needs, savings and investments).

Another thumb rule of speculation is to do it with moneys that you can afford to lose in entirety. That is, if the money value of these speculative were to unluckily become zero, it will not cause you any significant distress or financial strain. The mistake most people make when it comes to speculation is that first, they speculate with their entire free surplus and second, they speculate before taking care of their higher priority financial planning needs first.

Planning
Pyramid Planning

On our Independence day August 15, 2020, I wish you all achieve financial independence also through Financial Planning.

What is financial planning?

Financial planning is a process that allows you to manage your finances in a manner that it is linked to your life goals. A good financial plan should help you answer three basic questions:

Where are you today? - Your current financial position, earnings and responsibilities.

Where do you want to be tomorrow? - Your short-term and long-term goals that will require financial backing.

How do you get there? - What kind of investments should you choose and what plan should you deploy to achieve your goals.

One of the most important factor in anyone’s life is: money. You need to have an adequate amount of money to fulfill your goals and desires. More importantly, you need to have money at the right point in time.

For example, if you want to build up a corpus of Rs. 10 lakh for your daughter’s college education through investments, you need to grow this amount by the time she turns 18. Not a year later. This is where financial planning becomes essential.

What are Benefits of financial planning?

There are numerous practical benefits to financial planning. It helps you to:

1. Increase your savings

When you create a financial plan, you get a good deal of insight into your income and expenses. You can track and cut down your costs consciously. This automatically increases your savings in the long run.

2. Enjoy a better standard of living

With a good financial plan, you would not need to compromise your lifestyle. It is possible to achieve your goals while living in relative comfort.

3. Be prepared for emergencies

Creating an emergency fund is a critical aspect of financial planning. Here, you need to ensure that you have a fund that is equal to at least 6 months of your monthly salary. This way, you don’t have to worry about procuring funds in case of a family emergency or a job loss. The emergency fund can help you pay for varied expenses on time.

4. Attain peace of mind

With adequate funds at hand, you can cover your monthly expenses, invest for your future goals and splurge a little for yourself and your family, without worry. Financial planning helps you manage your money efficiently and enjoy peace of mind. Don’t worry if you have not yet reached this stage. If you are on the path of financial planning, the destination of financial peace is not very far away.

Financial planning for life goals -

The importance of personal financial planning in India cannot be ignored. It is not just about increasing your savings and reducing your expenses. Financial planning is a lot more than that. This includes achieving your future goals, such as:

1. Wealth creation
The rise in the price of everyday items means that if you want to maintain or increase your current standard of living in the future, you need to create a sufficient corpus of wealth. You may also want to purchase a better car or a new house in the future. All this requires money, and it merely highlights the importance of wealth creation. It is possible to achieve these goals by carefully investing your money in the right avenues.

2. Retirement planning
Your retirement may be 25 or 30 years in the future. But that does not mean you plan for it when you retire. To enjoy a happy and comfortable retired life, you need to start building your safety net right now. Planning at an early stage in life can help secure your future against financial uncertainties.

3. Child’s education
Education has become very expensive, not only in India but across the world. And in future, this cost is only going to rise. This is why it is necessary to start planning from the moment your child is born.

4. Saving tax
Every year, you are probably paying a substantial amount as tax. But you can now lower your tax outgo legally. The Indian Income Tax Act provides various provisions for people to reduce their tax outgo. By planning your taxes in advance, you can identify the best avenues to invest your money and reduce your taxable income. Insurance products provide a tax efficient avenue for investing for your life goals.

How to create a successful financial plan?

1. Understand your current financial situation
Determine the status of your current finances, viz., your income, expenses, debt, savings and investments. This is the first step in financial planning.

2. Write down your financial goals
Ask yourself: ‘what are the different financial goals I wish to achieve in life?’ Write them on a piece of paper. Don’t hesitate to put down any goal because no goal is too small or too big. However, make sure that your goals are specific.

3. Look at the different investment options
There are numerous investment options available to investors.

4. Implement the right plan
You need to select the right investment option based on factors such as your goals, age, risk appetite and investment amount.

5. Monitor your financial plan regularly
The financial planning process does not end once you invest your money. You also need to follow your plan because as you grow older, your goals and dreams evolve. For instance, your financial priorities may change after the birth of a child. Now, you need to accommodate the expenses and objectives of a new member in your family.

Conclusion -
Financial planning will help you adopt a disciplined approach to investing, accumulate wealth and meet your life goals. Breaking your financial plan down into little steps that are achievable each day or week will serve as a motivation to stick to the plan and realise your long-term goals.

Friends, please understand this concept and I wish you all achieve your financial independence as early as possible.