Financial Planning: Rules to be followed

Financial planning is the task of determining how can a business will afford to achieve its strategic goals and objectives. Financial planning is the process that provides you a framework for achieving your life goals in a systematic and planned way by avoiding the shocks and surprises. Usually, any company creates a Financial Plan immediately after their vision and objectives have been set.

The following are the rules to be followed for better financial planning:

• Management of your Money
• Regulating your expenses wisely
• Maintaining a personal balance sheet
• Dealing with surplus cash judiciously
• Creation of personal investment Portfolio
• Planning for Retirement
• Manage your Debt wisely
• Get your risks covered
• Planning your Estate
• Planning your Taxes

You can also read: Life Insurance Policies and Plans

1. Management of your Money

Managing your money need not be boring. Managing is not rocket science and you need not be from a financial background. You only need to show a bit of commitment. Making a decision to save is the first step towards money management. Saving money proves to be a powerful tool towards greater financial independence.

You may have many financial goals in your mind for which you need money. But where it’ll come from? You got to have savings! saving your money helps you in avoiding falling into debt traps. Not only this, but systematic saving on a regular basis helps in making you rich. You will be able to achieve your financial goals in a timely manner.

2. Regulating your expenses wisely for efficient Financial Planning

Start by categorizing your expenses into:

• fixed and variable;
• urgent and non-urgent;
• necessities and luxury;
• avoidable and unavoidable.

By doing this, you will be creating a full inventory of expenses in front of you. The more you convert things from abstract to physical, the better you will have a hold over them. You can create a hierarchy of needs and decide which ones to address first. It’s all about prioritizing.

You can even take the help from a great bundle of apps like Mint, Level Money, Mvelopes and such kind available out there. After addressing all the necessary expenses, you can allocate some money on entertainment and leisure. To avoid overspending, you can assign a no-spend day in the week. You shall commit to your budget. Consider it as a commitment instead of a burden.

Also read: Complete list of saving schemes in India

3. Maintaining a personal balance sheet

Maintainance of a balance sheet is one of a part of the accounting method which is essential for financial planning to be efficient. Having a personal balance sheet can be helpful in keeping an account of what you own and what you owe.  It’s a statement wherein you can write down your assets and liabilities. The difference between your assets and liabilities shows your personal Net Worth.

Before starting, pull together your bank statements and other proofs of the liabilities. Then make a list of your assets:

• the bank balance;
• all investments;
• home value;
• the value of other assets.

Then keep a sum of all the assets to get the total value of your assets. You can check about different asset management companies also. Afterward, make a list for your liabilities :

• the car loan;
• home loan;
• credit card balances;
• Remaining balances in other loans.

The sum of all the liabilities will show the value of the money you owe. When you subtract the value of liabilities from assets, you get your Net Asset Value. Ideally, it needs to be positive which means the money you own is greater than the money you owe. Don’t lose heart if it’s negative. As you keep repaying your loans, your Net Worth is going to increase gradually.

4. Dealing with surplus cash judiciously

When you don’t have a plan, you are likely going to indulge in overspending. This money could have been used in making you financially self-sufficient. If you don’t invest, your money won’t grow to help in your future goals and requirements. Investing can be a great way to channelize the extra cash and counter inflation. It can be used to grow wealth and divert it to goal accomplishment. The earlier you start investing the better. Investing need not be a difficult and boring task.

Start with identifying goals. Then, Categorize those goals into short-term and long-term.

• Goals that can be achieved within 1 to 3 years are essentially short-term.
• Those Goals that need a horizon of 3-5 years are called medium-term goals.
• Goals that require more than 5 years to achieve our long-term goals.

Then identify your risk scale i.e. the degree to which you are comfortable with a fall in the value of your investments. After identifying your goals and risk appetite, you can conveniently select the investment haven.

Mutual funds have come up as the most versatile investment heaven. You can start a Systematic Investment Plan (SIP) at a nominal sum of Rs 500. Under SIP, a fixed amount gets deducted from your savings and is invested in a mutual fund scheme of your choice.

5. Creation of personal investment Portfolio for Financial Planning

Building a portfolio involves distributing your investment amongst asset classes like equity mutual funds, debt, and cash. It is known as asset allocation. Although equity is the best tax-efficient and inflation countering vehicle. However, putting all your money in equity isn’t a prudent move. You need to diversify the sums that are to be allocated in each asset class as per your investment goals. It is always wiser to be a long-term investor in order to accumulate greater corpus. Your investment horizon would ideally be around 10-15 years.

Once you have constructed a portfolio, you need to rebalance it periodically to keep the portfolio risk within expected limits. This is relevant from the standpoint of market fluctuations. At the very outset, you may decide the time intervals after which you will be rebalancing. You can do it once every six months or a year.

Also read: Liquid Funds Taxation: How to Optimize Returns after Taxes

6. Planning for Retirement during the Financial planning

During financial planning making plans for the unforeseen future is important for a secure future. Planning for retirement has become all the more important today than it was a few decades ago. Due to increased life expectancy, you are going to live longer than your previous generation. Due to a busy and stressful lifestyle, you are more vulnerable to diseases like diabetes, hypertension and heart attacks. Healthcare costs are increasing with each passing year.

7. Manage your Debt wisely

Lack of debt management may eat up a major part of your paycheck. You may end up borrowing fresh loans to pay off older loans. If it gets out of control, then you may fall into a vicious debt trap. However, strategizing your debt payment may keep you away from such troubles. All you need is being informed about how much you owe to whom. And chalk out a schedule to pay them off.

In case you have a lot of debt to shoulder, start paying off the most expensive one. In fact, the credit card has been regarded as the most expensive form of debt. As soon as your salary gets credited each month, pay off your credit card balances in full. Make it a point to use the credit card only in case of an emergency.

8. Get your risks covered

First, you need to realize that your life and property are vulnerable to risks. These risks can lead to loss of income and put you and your dependents in financial jeopardy. Just like investing is essential for wealth accumulation, ensuring is essential for wealth preservation. However, investing and insurance are two separate things that most individuals don’t understand. Before buying life insurance, you can compare policies online to select the one which satisfies your requirement at affordable prices.

9. Planning your Estate

Every asset constitutes an estate whether it’s your vehicle or your home; the cash lying in your savings and current account. It’s your responsibility to decide what happens to these after you leave this world. You need to ensure that the right asset is assigned to the appropriate individual in the right manner.

Often, individuals misconstrue that estate planning is meant only for the wealthy. However, it is relevant for every person who can’t afford to leave his assets in the hands of the unwanted after he is no more around. Most of us might have never thought of doing estate planning. Some of us might be putting it off to a later date. But this is a wrong approach. You can start off estate planning as soon as you begin accumulating assets.

10. Planning your Taxes

In tax planning, you analyze your finances from a tax efficiency point of view so as to plan these in the most optimized manner. Even though tax planning is very much legitimate in nature, you need to ensure that you don’t indulge in tax evasion or tax avoidance.

From a tax planning standpoint, you can make use of a number of tax saving options. Like the deductions available from Section 80C through to 80U that are given in the Income Tax Act. The most efficient way to take advantage of Section 80C is to invest in Equity Linked Savings Scheme (ELSS). It has the shortest lock-in period as compared to all the other tax benefits options available under Section 80C. In this, you can save taxes up to Rs 45000 and avail a deduction of up to Rs 1.5lac. Additionally, the ELSS is a diversified equity fund helps you to achieve your financial goals via investment in the equity market.

You can also read: Best ELSS Funds

If you are just looking to start investing. But are not sure about the hows and the wheres. Visit WealthBucket. Get registered and let the market experts help you reap maximum benefits possible.

We provide all assistance related to Debt mutual fund, Large Cap mutual fund or Multi-Cap mutual fund, SIP Calculator and much more.

Call now at +91 9999379929. Or email your queries at contact@wealthbucket.in

Related posts:

What is STP | Key features to consider

Choose Best Tax Saving Investment Option

Mutual Funds Investment: Top 5 to consider in 2019