- 13 NOV 2018
4 Financial Planning Basics You Need to Know
Among all the planning you do Financial Planning is perhaps the most important but mostly ignored planning exercise.
Financial Planning requires you to consider planning about your life. It entails considering budgeting, savings, investments, taxes, insurance, retirements, and important life stage planning like children education, marriages etc.
It is an exhaustive process. But it is also an interesting process. It makes you think through the different life stages. The money you would need to live a comfortable life considering all the stages of your life.
“Planning is bringing the future into the present so that you can do something about it now.” Alan Lakein
You may need a financial planner to refine your plan but it is advisable to initiate the process of your own with your spouse.
Here are the basic components of a good financial plan:
Before you start, you need to consider all possible known aspects of your life you need to consider.
These are your present income, your present lifestyle, your present savings and investments. You have to keep your present budget in mind when you plan for the future.
You may decide to live a frugal life for a better future but that should not deprive you of a reasonable quality of life at present.
Having taken care of the present, you need to plan for the possible future events like childbirth, schooling of your children, their higher education, their wedding, your financial responsibility towards your parents, pursuing your dreams and your retirement corpus etc.
Note down all these aspects, and tentative year of happening. Then the next is Goal setting.
Having listed the life events, you need to know how much money you may need to manage these events
Ignore the inflation aspect for the sake of simplicity.
This exercise will give you an idea of the money required at each life stages. You know your goal. You know the time you have to achieve the goal.
Having a goal will keep your mind aware of the things to come. You will not be haphazard in your financial behaviour.
“Always prepare yourself for a financial emergency, even when you don't see a possibility of a rainy day in your future.” Edmond Mbiaka
Life does not unfold as per your planning. There are several contingencies you may encounter. Incorporate likely contingencies in your plan.
This could be a sudden major illness, loss or change of job, change of city, and any such things which impact your financial plan.
You may have 3 children but you had planned for 2. You need to spend more on higher education of your children. You need to spend more on the health of your parents who were uninsured.
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Things may change. You may need to amend the plan. Review the plan periodically and amend it to make it realistic with the present circumstances.
Anything happened which is unplanned will impact your financial plan. Make your plan adaptable to the new realities.
Planning is about preparation for the future. You need to consider possible future scenarios.
Sometimes you may not be able to do anything to avoid the contingencies but an adaptable plan will help you to think about Plan B or Plan C.
A rigid plan or a plan not reviewed periodically becomes stale
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Your plan should be realistic. It could be aspirational but not lofty. Be optimistic but be cautious.
A conservative and realistic plan will make you ready for the worst. A lofty plan will make you careless.
An unrealistic plan will go haywire and you will be vulnerable sooner. Be realistic, be conservative and then enjoy the upside.
“In preparing for battle I have always found that plans are useless, but planning is indispensable.” Dwight D. Eisenhower
What is critical is you need to undergo the planning process. You may not be the financial planner but remember you are the planner of your life.
Before you go to a doctor or a dietician you need to know your body and your health status. Similarly, you need to know everything about your finances and future plans before you meet a financial planner.
You plan your life when you plan your finances.
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