FINANCIAL PLANNING -MANAGE YOUR PERSONAL FINANCE
What is a Financial Planning ? Financial planning Meaning
Financial planning is making a plan to remain financially healthy in future. In the process, you specifically manage your finances in sucha way that you are prepared for all of the potential costs and issues that may arise. The process involves evaluating your current financial situation, identifying your goals and then developing and implementing the plan .
FINANCIAL PRUDENCE
"A budget tells us what we can't afford, but it doesn't keep us from buying it." William Feather
Management of one's finances is management of income and expenditure. The difference viz income minus expenditure is one’s savings in individual’s case and profit in case of an enterprise. Financial planning consists of income planning ,expenditure planning and lastly planning your savings . We also have to take in to account the risks we may encounter in keeping up our planned income and expenditures . To mitigate those risks , we will require insurance . Once we have savings in our hands, planning our investment becomes necessary. If we had borrowed funds to create our income, we also require planning for repaying those borrowings. Once we have completed planning our income, expenditure, and insurance, we need to think of investing a balance of savings in a profitable useful way to cater to our dreams and fears of the future.
Expanding Income streams
“Never depend on a single income. Invest to create a second source.” Warren Buffet
There is also a saying that one in hand is better than two in bush. Before trying to find a new source of income, one should optimize his present income which comes from his main profession/business service. You never undermine your present position while chasing a new one. Core strength should be fully exploited ..
We will be coming out with a series of articles on how to improve Income .
Expenditure Control
"Beware of little expenses. A small leak will sink a great ship." Benjamin Franklin
Normally we increase our expenditure in line with the increase of our income. We spend according to our status, meaning our level of income . Our ability to curtail the tendency to enhance expenditure will greatly enhance our savings ability.
Austerity programs to reduce expenses are common as New Year resolutions for an individual. or as corporate plans for downhill companies. Such plans are normally short lived. We are not recommending foregoing one‘s day to day pleasures for the sake of future dream. Even if we realise our dream after 20 years of forbearance, we would have lost precious 20 years of life with day-to-day frustration of not being able to do what we love to do .A billionaire at 60 cannot enjoy the pleasures what he would have enjoyed at the age of 30 . So enjoy what you like to enjoy now , but remember what you can afford and what your future plans are . One should not put oneself into financial mess by trying un-affordable joy .
There are ways to control our expenses even while indulging. For example , eating good food need not be necessarily at a five-star hotel . Good quality dresses need not be top-of-the-range brands . We need not upgrade our TV/car/mobile just because a newer version has come or a friend or neighbor has bought. One can always find ways to curtail expenditure without sacrificing the luxuries of life . Even our loved brands come out with discounts and we have to have patience. Most of our expenses occur not on our daily needs , we spend more on our fancy to become updated , modern , high flying fashionable rich looking gentlemen / ladies . Most of the time austerity measures aim at daily needs and hence they become failures . One need not mind expenses on daily needs and never cut on them . But always try to reduce spending on extras and wait for appropriate time to buy such luxury items . There would be Diwali sales or new year sales or end of the season sales when you can indulge some times at 50 % of original cost . The more one can avoid escalation of expenditure , more one will enhance his ability to save .
RISK MANAGEMENT -INSURANCE
"A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life."
Suze Orman
Events like loss of job , accident , hospitalization , disease , theft etc or loss of life of earning member etc may be unforeseen , but not uncommon . We may not know when any of such things would happen , we should be prepared for any eventuality. While loss of job , loss in business or loss of life may erode our income , accident or disease may bring us unexpected huge expenses . Insuring our selves and our family against such risks should become part of our regular expenses and should be treated as essentials . While insurance is available for many risks we may encounter ,we have to separately provide for loss of job or business loss , in case .
While taking insurance , care to be taken that all possible risks are covered through various policies adequately against maximum loss envisaged . Life insurance normally will have savings component and many use them as investment options . As they carry maintenance charges , they are not suitable purely for investment purpose . There are various insurance companies offering their services . Before taking any insurance , one should compare terms and conditions, premiums charged and suitability for of the policy and standing of the insurance company . There are portals offering comparison services which can be used
Please go Our Insurance pages for detailed information on Insurance .
TAX PLANNING
"The avoidance of taxes is the only intellectual pursuit that still carries any reward " .John Maynard Keynes
Tax is necessary social and legal obligation and one has to provide for the same unless it is deducted at source . However there are various provisions under law by which one can obtain exemption from paying taxes . Section80 series in the income tax law is mostly used by the middle class to save on taxes . Tax consultants/ chartered accountants are helpful in getting all eligible exemption to reduce the burden of tax .
Income tax Department of Govt of India has a very useful portal which churns out valuable guidance for tax payers . One can go through and understand the basics . Further there are practical tips for computing tax which can be read and used .
INVESTMENT PLANNING
The balance left after our income and expenses is our current saving and can be used for investing in our goals to achieve our long term dreams . Expenses include tax payment, loan installments and insurance . As discussed earlier , expenditure control paves way for more savings and more investment . Some do not agree with the view of investment with balance of income over expenses . According to them , a portion of income after tax payment should be dedicated to investment first and balance to be spent for current needs. Accordingly they place higher importance to future dream to current living . The method will definitely improve our journey towards our long term goals of becoming rich with greater savings , but will come with a cost on today's living . We have seen people who have chosen the second method becoming rich over the years , having palatial houses in their golden age .When talked to them about their journey , they rue for ignoring their youthful days . As their money had gone to the compulsory investment like real estate at their prime time,much of their earning would go towards loan installments . They had to sacrifice all their day to day pleasures like eating out ,spending on entertainment , travel and they had to work more hours to earn even for day to day expenses . They had become earning machines . Now the investment has given great results and they have become rich . But they rue that the money now they have can not bring them the missed joy of happy youthful living .
Hence it is call one has to take between choosing present over future . Any how in both cases , one has to have control and discipline in managing today's spends . Moderation in our spending habits will definitely help .Such moderation will help us to save more for future and invest more .
Once we have savings in our hand , the next question is how to invest and where to invest .
Before investing our money in any financial instrument or gold or real estate or any other means , we have to invest our time to have knowledge about the things we are going to invest and invest that knowledge in assessing the nature of instruments , safety factors , risks and rewards and suitability to our needs . Hence investing our time and knowledge is primary requirement to successfully deploy our money .
Investment we make should fit in to our goals and we should be able to encase them when we need for the purpose .For example if we have a plan to buy house in next three years and we are accruing our savings towards the margin requirement , we should be able to encase the investment by then .
We have to assess how much we can invest and over what period and whether our income pattern supports such investments .
Other important factor is risk level of our investment . No investment is risk free . Even holding cash has risk of theft . Each instrument carries its own risk and one should be aware of the risks before investing . care also be taken to mitigate the risks where ever possible . rewards of investing should be weighed against involved risk .
We also have to keep in mind the time , cost and effort needed to withdraw our investments either in case of emergency or at the time of maturity .
Thus before investing we have to keep 4 points in mind :
1 .Goal of our investment
2. Our stamina to invest
3. Risk & reward of investment
4. Withdrawal cost
There are various avenues like bank deposits, mutual funds , insurance policies , real estate , gold etc . On each of the investment avenue , we have articles to guide you in taking decisions on investments , risks and rewards .
FINANCIAL GOAL TO BE FUTURE READY
So far , we have discussed how to manage the present . But we are not satisfied with what we earn , what we spend and what we save . Normally one wants to progress towards better income , better life style , more luxuries , better education for children , better preparedness for eventualities , more prosperity and worry free retired life .
We want progress in our carriers , bigger business to handle , bigger home to live in , bigger cars , bigger TV , fat bank balances and higher status in the society . To achieve what ever we want in future , we can plan today , make priorities and make progress towards fulfilling our dreams . If we want better carrier , we have to plan for the same . We may have to study for higher education , learn smarter skills to manage our carrier . If we want better financial position tomorrow , we need to plan today . This site is about planning financials for future prosperity.