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Importance of Financial Planning
When you are embarking on an investment journey, it is important to start with a clear idea of what you are aiming for. In financial parlance, you should have a ‘financial plan’ before you think of investing. When investment goals are chalked out in a financial plan, it helps you maintain focus and work towards achieving your goals.
Definition
Financial planning is a process that allows you to manage your finances in a manner that it is linked to your life goals. A good financial plan should help you answer three basic questions:
Where are you today? - Your current financial position, earnings and responsibilities.
Where do you want to be tomorrow? - Your short-term and long-term goals that will require financial backing.
How do you get there?- What kind of investments should you choose and what plan should you deploy to achieve your goals.
Identifying your goals
Before you chalk out a financial plan, you must determine your goals. Make sure you keep them realistic and assign a time frame to each of them.
Here are some typical examples of financial goals for a person in the 20s.
0-5 years
Implement a disciplined savings and investment plan
Save money for a first home
Buy adequate life and health insurance cover
Create an emergency fund of 3 months of basic living expenses
Purchase a car
5-10 years
Have enough money for the down payment of the first home
Plan for a wedding
Prepare for the birth of a child
Provide for the education of the child
10 years and above
Provide for higher education and marriage of the child
Plan for healthcare needs during retirement
Plan for housing needs in retirement
Plan to support aging parents
Prepare a will and execution plan
Creating an action plan to realise your goals
Once you have identified your goals, you need to determine how much those goals will cost you in the future. Based on the amount you will require for your goals in the future, you will need to determine how much you need to save and invest. For instance, say you want to save for your child’s MBA 10 years from now. Determine the cost of an MBA now and 10 years down the line. Based on the corpus you need to have in the future, determine how much you need to save and invest now. Ensure you don’t falter on this saving, even if it means giving the weekly visit to the shopping mall a miss. Give these goals the priority they deserve and stick to your action plan.
Investing towards your goals
With a financial plan, you are clear about the goals for which you are saving and investing. When you have set an achievable goal and set yourself a reward at the end, investing towards the goal becomes easier. Also, the earlier you start to invest, greater is the benefit from the power of compounding over time.
A key component of your financial plan is your asset allocation strategy that determines how you will divide your investments across instruments. It is also important to revisit your asset allocation strategy and the actual asset allocation of your investments over time for any rebalancing that may be required.
Financial planning will help you adopt a disciplined approach to investing, accumulate wealth and meet your life goals. Breaking your financial plan down into little steps that are achievable each day or week will serve as a motivation to stick to the plan and realise your long-term goals.
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#1
Always have a clear financial roadmap before you begin to invest.
#2
Identify your objectives before coming up with an investment strategy.
#3
Revisit your financial plan periodically to check if it requires any changes.
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