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.
