Financial Planning: Start as early as you can

Financial Planning: Start as early as you can

Planning of financial resources is essential for everyone. The early one begins to manage money, the better it is. People have always been responsible for managing their own finances on a day to day basis – spend on a holiday or save for new furniture; how much to put aside for a child’s education or to set them up in life – but recent developments have made financial education and awareness increasingly important for financial well-being. The growing sophistication of financial markets means consumers are not just choosing between interest rates on two different bank loans or savings plans, but are rather being offered a variety of complex financial instruments for borrowing and saving, with a large range of options. At the same time, the responsibility and risk for financial decisions that will have a major impact on an individual’s future life.

Individuals will not be able to choose the right savings or investments for themselves, and may be at risk of fraud, if they are not financially literate. But if individuals do become financially educated, they will be more likely to save and to challenge financial service providers to develop products that truly respond to their needs, and that should have positive effects on both investment levels and economic levels.

STEPS in Financial Planning

1) Knowing your various sources of income

2) Identification of your goals and risk appetite

3) Gap Analysis

4) Preparation of financial plan

5) Implementation of plan

6) Regular monitoring of the plan

Step 1- Knowing your various sources of income

First step in preparation of financial plan consists of recognisation of the various sources of income. Excess of revenue over expenditure is known as income. Various sources of income consists of

Income from salary

Income from House property

Income from business and profession

Income from capital gain

Income from other sources

Step 2-Identification of your goals and risk appetite

Identification of goals is must in order to prepare financial plan. Goals must be prepared according to the risk bearing capacity of the individual. Goals must be SMART

S- Specific

M- Measurable

A-Attainable

R- Realistic

T- Time bound

Step 3- Gap Analysis

Identification of financial gap between where one is and what one wants to achieve must be recognized. Financial Plan can only be prepared if one has proper knowledge regarding this financial bridge which one needs to cover.

Step4- Preparation of financial Plan

Depending upon the risk, return, liquidity, duration, flexibility and tax benefits, one has to prepare the financial plan. One needs to decide between the various alternatives available such as

·         Banks- saving account, recurring deposit, fixed deposit

·         Govt schemes – NSC, PPF, Post office schemes, equity linked savings scheme, Infrastructure bonds or Kisan vikas patra

·         Bonds

·         Debentures

·         Mutual funds

·         Equities

·         Real estate

Step 5 and 6- Implementation and review of plan

Proper implementation and periodical review of the financial plan is must

Educated investor – A protected investor