Financial planning or financial management is a step-by-step strategy that helps individuals/entities achieve their goals and effectively mitigate crises. It helps track income, expenses, savings and investments, thus keeping track of it all to keep your finances smooth.
Financial planning is a holistic approach to managing your finances now and in the future. Acting as a guide, it helps achieve goals and stay prepared for financial needs. Be it your first home, children's education or a corpus after retirement, a disciplined investment routine can help you achieve it all.
"When you start your investment process, you need to start with risk management. Risk management involves three aspects - one is life insurance, the second is health insurance and the third is building an emergency fund," said Hemant Rustagi, CEO, Wiseinvest. Dos.
Rustagi said the whole purpose of investment is to fulfill the dreams one has for himself or his family.
Financial management procedures
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. That's when life insurance comes into play and helps by providing financial support, Rustagi said. Life insurance is a risk management tool.
2. Health Insurance: "Our lifestyles have become so expensive these days that if someone spends five days in the hospital, their budget for the next year or two will collapse. So it's important to have health insurance that allows you to cover medical expenses." Rustagi said.
3. Emergency Fund: Experts say that if one does not have an emergency fund, it can sometimes dent one's investment fund.
Rustagi says having the right product is just as important. "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 build an emergency fund and keep it in pure liquid form," Rustagi said.
He said that one should always follow an investment strategy, be it short term, medium term or long term.
4. Asset Allocation: "The most important aspect of money management is asset allocation. One should keep in mind for what purpose they should invest in equity, such as retirement planning and children's education, that money can go into equity. If it's a short-term long-term goal like a vacation or a college fee that money has to go into safer instruments. In the medium term, one can invest in equity and debt," Rustagi said.
5. Save first, spend later: A financial advisor said one should avoid spending first. "One should save first and spend later. People should be committed to their investment goals and first withdraw money from their earnings for that purpose," he said.
6. Start investing early: According to an expert, when one is young, one can take risks. "When you are young, you can afford to make mistakes because time is on your side. So one can invest in stocks and take risks because it helps beat inflation in the long run. The main advantage of investing in stocks is the power of compounding," Rustagi said.
Principles of financial planning
1. Never equate savings with investing: Rustagi says one should never equate saving in the bank with investing. "Many people think that saving and investing are the same, but they are not. While the goal of both investing and saving is to secure the future and maintain discipline, the two are quite different. In the process of creating wealth, saving is the first step, but it is investing, which 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 - equity risk and inflation risk. We all focus on the equity risk because we don't want to lose part of our investment. And in the process we ignore the much higher inflation risk because in the long run if one continues to invest in traditional options , the returns will be low and in most cases taxable. So we will not get a positive rate of return due to inflation and taxes," Rustagi said.
3. Avoid portfolio confusion: Rustagi advises investors not to make frequent changes to their portfolios. "While monitoring is important, it shouldn't be done just to make portfolio changes. If you're constantly changing your asset allocation, you're missing out on a lot of opportunities in the market," he said