In This Article We Tell You About 12 Thing To Understand The Need Of Financial Planning & Essential Financial Planning Rules For A Successful Journey In 2024
What is financial planning?
Financial planning is a step-by-step approach to meet one’s life goals. A financial plan acts as a guide as you go through life’s journey. Essentially, it helps you be in control of your income, expenses and investments such that you can manage your money and achieve your goals.
If you take a closer look at the above examples, you’ll find that there is one factor that connects all of them: money. You need to have an adequate amount of money to fulfil your goals and desires. More importantly, you need to have money at the right point in time.
For example, if you want to build up a corpus of Rs. 10 lakh for your daughter’s college education through investments, you need to grow this amount by the time she turns 18. Not a year later. This is where financial planning becomes essential.
What are Benefits of financial planning?
There are numerous practical benefits to financial planning. It helps you to:
- Increase your savings
It may be possible to save money without having a financial plan. But it may not be the most efficient way to go about it. When you create a financial plan, you get a good deal of insight into your income and expenses. You can track and cut down your costs consciously. This automatically increases your savings in the long run. - Enjoy a better standard of living
Most people assume that they would have to sacrifice their standard of living if their monthly bills and EMI repayments are to be addressed. On the contrary, with a good financial plan, you would not need to compromise your lifestyle. It is possible to achieve your goals while living in relative comfort. - Be prepared for emergencies
Creating an emergency fund is a critical aspect of financial planning. Here, you need to ensure that you have a fund that is equal to at least 6 months of your monthly salary. This way, you don’t have to worry about procuring funds in case of a family emergency or a job loss. The emergency fund can help you pay for varied expenses on time. - Attain peace of mind
With adequate funds at hand, you can cover your monthly expenses, invest for your future goals and splurge a little for yourself and your family, without worry. Financial planning helps you manage your money efficiently and enjoy peace of mind. Don’t worry if you have not yet reached this stage. If you are on the path of financial planning, the destination of financial peace is not very far away.
Financial planning for life goals
The importance of personal financial planning in India cannot be ignored. It is not just about increasing your savings and reducing your expenses. Financial planning is a lot more than that. This includes achieving your future goals, such as:
- Wealth creation
The rise in the price of everyday items means that if you want to maintain or increase your current standard of living in the future, you need to create a sufficient corpus of wealth. You may also want to purchase a better car or a new house in the future. All this requires money, and it merely highlights the importance of wealth creation. It is possible to achieve these goals by carefully investing your money in the right avenues. Equity mutual funds can be a suitable option for long term goals. These funds could help the investor to accumulate wealth in the long run. - Retirement planning
Your retirement may be 25 or 30 years in the future. But that does not mean you plan for it when you retire. To enjoy a happy and comfortable retired life, you need to start building your safety net right now. Planning at an early stage in life can help secure your future against financial uncertainties. Also, you invest lesser amounts if you start early and gain from the power of compounding which helps to build a large enough corpus over the 25-30 year period. - Child’s education
Education has become very expensive, not only in India but across the world. And in future, this cost is only going to rise. This is why it is necessary to start planning from the moment your child is born. Calculate how much you wish to earn and start investing in long-term investment avenues that can help you achieve this goal. You can approach a financial advisor for advice if you are not sure how to proceed further. - Saving tax
Every year, you are probably paying a substantial amount as tax. But you can now lower your tax outgo legally. The Indian Income Tax Act provides various provisions for people to reduce their tax outgo. By planning your taxes in advance, you can identify the best avenues to invest your money and reduce your taxable income. Mutual funds provide a tax efficient avenue for investing for your life goals.
2023 was an excellent year for investors. The Nifty 50 gave good returns of around 20% and mid and small-caps did even better. Gold sparked investors’ portfolios with around 13% returns.
In 2024, with interest rates expected to go down, will debt funds take the crown? What is the outlook for gold and equities in 2024? Will gold continue to rally with geopolitical tensions rising? Will equities continue outperforming or take a backseat? This is where financial planning and asset allocation are important.
As an investor, your focus should be on financial planning and not chasing returns. The new year brings a lot of enthusiasm and optimism. Use this opportunity to streamline your financial freedom journey with these 12 financial planning rules.
Take expert help to make smart decisions
In this era of Do It Yourself (DIY) platforms, a qualified and experienced investment expert’s importance must be recognised. The expert can handhold you for listing financial goals, making goal plans, making investments, and regular reviews till the goals are achieved.
Adopt budgeting
Budgeting helps you free up financial resources for investing towards financial goals. For example, the 50/30/20 budgeting method allocates 20% of income towards savings and investments. Automate your investments through SIPs, and insurance premium payments through auto-debit instructions. Keep the SIP date around 2-3 days after your salary date so that the investments are taken care of, and you can spend the remaining amount on needs and wants.
Gain knowledge of risk and reward
Usually, the higher the risk, the higher the expected reward, and vice versa. An investment expert can help you identify suitable financial products based on risk, investment time horizon and other factors.
Understand the impact of inflation and compounding
Inflation is a silent monster that erodes the value of your money. On the other hand, compounding, which Albert Einstein called the world’s 8th wonder, helps you grow your money. Long-term investing helps you benefit from the power of compounding and earn inflation-beating returns.
Set clear goals
You should set SMART goals: (S)pecific, (M)easurable, (A)chievable, (R)elevant, and (T)ime-bound. It helps pursue them till achieved. Setting up SMART goals will help you stay focused on achieving them.
Take informed risk
Taking measured risks in investments is important. Investing in a product that gives you 12% annual growth vs a low-risk product that gives you an 8% annual return can have a significant (2-3 times) impact on your final accumulated corpus. Take informed risk for your long-term goals keeping this in mind
Build tax efficiency
While investing for goals, maximise the deductions under Section 80C of the Income Tax Act. For example, a Nifty 50 Index fund (ELSS) can give an annual deduction of up to Rs. 1,50,000 compared to other Nifty 50 Index funds (non-ELSS). Similarly, you can save tax with NPS contributions (Section 80CCD), and health insurance premiums (Section 80D) for self and family.
Regular reviews
Sit with an investment expert to review the progress of your financial goals every 6-12 months till they are achieved. A review helps to replace underperforming investments with appropriate new ones.
Don’t time the market
Time in the market beats timing the market. Rather than speculating on the entry and exit points, stay invested for the long term till your goals are achieved.
Invest systematically
The SIP mode makes you invest regularly in a disciplined manner. Using step-up SIPs, increase the monthly investment amount annually in line with your increasing income.
Focus on investing behaviour and process
Greed and fear are an investor’s biggest enemies. While investing, keep your emotions aside and trust the investment process to sail through the tough times and enjoy the good times.
Don’t chase returns
As long as your investment returns meet the expected rate of return in the long run, you don’t need to chase schemes with the highest returns in 1, 3, or 5 years. The table toppers will keep rotating every quarter. Adopt a strong investing process that provides resilience for staying invested despite market volatility.
The financial planning journey is a marathon and not a sprint. Hence, following these 12 financial planning rules will keep you in the race for the long haul till the financial goals are achieved.
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