Whether you’re trying to save up for a foreign vacation, buy that dream car, buy a new house or even accumulate a corpus for retirement, financial planning is the way to make it happen.
While your financial plan is designed to cater to your individuality as an investor, there are some fundamental rules that everyone should know. So to help you strengthen your foundations, here are the 6 golden rules of financial planning:
Start Saving early
When it comes to financial planning, the earlier you start, the better. It is only then that you can utilize the full power of compounding. For example, if you start investing INR 5000 per month at 8% per annum when you are 25, then by the time of you retire at 60, your corpus will have approximately INR 40 lakhs more than if you had started the same when you are 30.
Anyone nearing retirement age will tell you the years slip by and building a sizable nest egg becomes more difficult if you don’t start early. You’ll also probably acquire other expenses you may not have yet, such as a mortgage and a family.
Make sure you have sufficient Insurance which would protect and secure the well-being of you and your family. Each insurance type would vary from individual to individual as their needs would differ as per the life stage levels. So basic coverage of health, life, home and vehicle insurances are a must in your financial plan.
Emergency / Contingency fund
Job loss, Pandemics like Covid, Accidents and medical emergencies are unpredictable events, but usually require immediate attention. Maintaining an emergency fund will ensure that neither your cash flow is deterred, nor are your investments and goals affected in the event of any contingency. Here it is recommended that you set aside an amount of around 6-9 months of your monthly expenses, primarily composed of liquid funds.
Sir Franklin Templeton once said nothing in this world is certain apart from death and taxes. Heeding this advice, you should never avoid paying your taxes – whatever the reason – as it could affect your goals detrimentally in the future. Then, because tax is inevitable, you should have knowledge of the deduction that may apply to you particularly, so that you can optimise the tax efficiency of your financial plan.
Diversify your Assets
There should be a component included in your financial plan to review your asset allocation strategies against your risk profile at different intervals. This will enable you to find the right diversity of investments in equity and other assets like bonds, mutual funds, annuities, property, etc. over time. Here it is good to remember that your propensity to take risk is likely to decrease as you get older, when there are other people who are dependent on you.
Retirement Planning at each stage of life
It is a common misconception that your Public Provident Fund (PPF) contributions will solely see you through a comfortable retirement. A comprehensive retirement plan is multifaceted, and shifts focus based on the period of life you occupy. In this sense, your retirement plan should also include investments in equity and other similar assets particularly in your 20s and early 30s – when you can take more risks. As you grow older, you should think about making contributions towards the National Pension Scheme (NPS) or another annuity. This keeps your savings secured, with assured returns for when you decide to retire.
Remembering these points will prove to be key when you are in the process of financial planning. Another important thing to remember is the need to seek professional advice. In line with this, working with a professional is a good way to make sure that you don’t commit any costly errors while developing or executing your financial plan.