Financial Planning is a holistic approach towards managing the present and future of your finances.
Financial Planning or financial management is a step-by-step strategy that helps individuals/entities achieve their goals and mitigate crises effectively. It helps track income, expenses, savings and investments and thus keeps a tab on all of these to make one’s finances smooth.
Financial Planning is a holistic approach towards managing the present and future of your finances. It acts as a guide and thereby helps achieve goals and stay prepared for financial exigencies. Be it your first home or children’s education or post-retirement corpus, a disciplined investment routine can help you accomplish it all.
“When you begin your investment process, you need to begin with risk management. Risk management involves three aspects – one is Life Insurance, second is Health Insurance and third is creating an emergency fund,” said Hemant Rustagi, CEO of Wiseinvest, explaining the Dos.
Rustagi said that the whole goal of investment is to fulfil the dreams one has for himself or his family.
Do’s of Financial Management
1. Life Insurance: Life is uncertain and while an individual plans for the welfare of his family, and in case something happens to that individual, those aspirations, and dreams cannot be achieved. At this juncture, life insurance comes into play and helps by providing financial support, said Rustagi. Life insurance is a risk management tool.
2. Health Insurance: “Our lifestyle has become so expensive today that if somebody spends five days in a hospital, his budget for the next one or two years will go haywire. So, it’s important to have health insurance to fund your medical expenses,” said Rustagi.
3. Emergency Fund: Experts say that if a person doesn’t have an emergency fund, then he may keep on disturbing his investment fund now and then.
Rustagi says that it’s equally important to have the right product. “For life insurance, take a term plan and for health insurance, if you have a small family, take a family floater, and invest in a liquid fund to create an emergency fund and keep it in a pure liquid form,” said Rustagi.
He said that one should always follow goal based investment strategy, be it short-term, medium-term or long-term.
4. Asset Allocation: “Most important aspect of money management is asset allocation. One should keep in mind for which purpose they should invest in equity-like for retirement planning and children’s education, that money can go into equity. If it’s a short-term goal like vacation or college fee, that money has to go into safer instruments. For the medium term, investment can be made into equity and debt,” said Rustagi.
5. Save First, Spend Later: The financial advisor said that one should avoid spending first. “One should save first and spend later. People should be committed to their investment goals and take out money first from their earnings for the purpose,” he said.
6. Start Investing Early: According to the expert, when one is young, he/she can take a risk. “When you are young, you can afford to make mistakes as time is on your side. So one can invest in equities and take risks as it helps beat inflation in the long run. A major benefit of equity investment is the power of compoundings,” said Rustagi.
Don’ts of Financial Planning
1. Never Equate Saving with Investing: Rustagi says that one should never equate saving in the bank with investing. “Many people think that saving and investing are the same thing but it’s not. While the objective of both investments and savings is to secure the future and maintain discipline, both are completely different. In the wealth creation process, saving is the first step but it’s investing that will help create wealth,” he said.
2. Don’t Rely on Traditional Options: Investors should not rely only on traditional investment options like Fixed Deposits. “We face two risks- risk of capital and risk of inflation. All of us focus on risk for capital because we don’t want to lose a part of our investment. And in this process, we ignore the much higher risk of inflation because in the long run, if one keeps investing in traditional options, the returns will be low and taxable in most cases. So one will not get a positive rate of return considering the inflation and tax,” said Rustagi.
3. Avoid Portfolio Turmoil: Rustagi suggests investors to not make frequent changes in their portfolios. “While monitoring is important, it should not be done only with the purpose of making changes in the portfolio. If you keep changing your asset allocation, you will lose out on a lot of opportunities in the market,” he said.