Working to a Plan

The most important point in financial planning is that one must start early. Consider this example: Rahul and Samir have been friends for a long time. They are of the same age. Rahul started investing Rs 10,000 every month at the age of 25 while Samir started at 35. At 55 years of age, when both plan to retire, Rahul's corpus would grow to Rs 2.27 crore assuming returns of 10 per cent a year while Samir would have just Rs 76.50 lakh. A small amount invested over a longer period will have a big impact on one's portfolio. It cannot be compensated even by doubling the investment

However, not all youngsters are in the mood to save when they start their career. Their pay cheque may not be fat, but they do not have many responsibilities at this stage. That is why the urge to spend is high considering that they are tasting financial independence for the first time.

Right age

Contrary to popular belief, financial planning is for all age groups. While the young have to plan for their entire life, the middle-aged have to ensure they don't fall short of money after retirement.

Irrespective of the age, there are some problems we can face anytime. The relevance of a financial plan is fully understood when you start to put your entire future in perspective, emotional as well as financial. The plan should primarily answer three questions. Where you are today, where do you want to be tomorrow and what you must do to get there. A financial plan helps you deal with the effect of inflation and build a retirement corpus. It may also prevent straining of finances during unforeseen events such as medical emergencies.

There is no minimum amount you need to start saving. You can start with as low as Rs 500 every month, which if invested over the next 25 years could fetch Rs 12.75 lakh at maturity assuming a modest return of 12 per cent.

Four-point check list

Simple way to start would be to have a four-point checklist. The first step should be to keep track of income and expenses through a simple budgeting exercise. The cash flow exercise helps in reduction of debt, saving efficiently for goals and taking investment decisions. It is absolutely essential unless you are among those who have received a seven-figure inheritance. A surplus will indicate that you have extra money to invest while a shortfall will show your liabilities. In short, it will illustrate your financial behavior and what your future may look like if you stay on your current path.

The second step is to identify and prioritize goals. Identify the goals, how far they are in the future and their cost in today's terms

Now, make your money work for you, by developing an investment plan. Once you have identified your goals and mapped them to the time horizon, you can develop an investment plan by choosing products that match your risk-taking ability.

Last are investment avenues. Mutual funds, bonds and public provident fund are most effective ways to implement a financial plan. However, the investment should be based on one's risk profile and be spread across different assets in order to minimize risk and enhance risk-adjusted returns.

About Author: The author of this article has done research on topics related to business solutions.