Financial planning is the continuous process where in one defines the goals of life and achieves those goals using proper management of finance. It helps one make proper provisions of their financial needs which will arise in the future. The main objective of this is to make sure that you have right amount of money available at the right time in the right hands in the future so as to achieve financial goals.Why should I make a financial plan?
Most people ignore this side of financial planning ie creating a proper Financial plan. But this provides direction and meaning to your financial decisions. It allows one to understand how each financial decision taken will affect other areas of your finance. For example, it helps in making decision that whether X asset class or investment product will provide you comfortable retirement or will you require to take more risk to achieve the said goal.Who you need to hire for Financial planning?
A financial planner is one who uses the financial planning techniques / process to help you achieve your goals. The main job of the planner is to help you identity the need for financial planning, set priorities to the desired goals and assign products against each goals based on the risk appetite. He or she should have sound knowledge on wide variety of financial planning products and tools to achieve the same . One with all the below qualities and one who can present the wider picture is the one whom you should hire for Financial planning.
There are certain financial sites , softwares , magazines, Algotraders who can help you do your own financial planning , but I strongly suggest one should take help of a professional financial planner for the same. Well known fact is that when it comes to decision making the EMOTION's play a major role and mostly investors take emotional decision more than the rational decisions which is more required while doing your financial planning and hence Professionals are required.
This is the most easy reply to shy away from your future planning , I would suggest you to have a budget in you mind. Determine you cash Flow i.e what you earn vs what you are actually spending each month. There will be certain fixed expenses like rent, EMI's etc which are required to be paid but there will be certain variable costs like food , clothing, movie / entertainment expense etc which are generally unnoticed and eats huge part of our unnecessary spending . Kindly keep a check on them and start Saving.
A financial plan should include
The first and most important step in your life as an investor is to define your goals at the onset of your investing activity. This will map the road ahead for you in terms of time, amount, type of asset and risk. At this point of time you must also decide how much you are willing to save. When you look at defining your goals think carefully and try to include all your requirements, here are a few things that might help you:
A simple way to get an overall perspective is to draw a time line starting from today with the amount you have saved up till now labeled at time zero. Going forward you can label your major outflows as and when they occur till retirement and then the steady outflows for your retirement income. Please remember your worst enemy “Inflation” and factor this into your targets. Remember that in an inflationary environment an apple will cost more tomorrow than today.
For example: Let us say that you have Rs. 5,00,000 saved up today. In addition to this you figure that in year 10 you will need Rs. 5,00,000 for your daughter’s wedding. Also you decide with your wife that you will retire in thirty years time and will need Rs. 6,00,000 per year for 15 years after that. You also decide that you want to play it safe and want to invest only in debt products. Taking an annual rate of return of 7.00% you will have to save Rs. 38,042 per year for thirty year and you will be able to withdraw Rs. 4,61,958 (5,00,000 – 38,042) for your daughter’s wedding in year 10. Another scenario with 9.00% is available as well.
Now let us assume that you and your wife require Rs. 20,00,000 per annum for 15 years after retirement and want to spend Rs. 15,00,000 on your daughter’s wedding. Knowing this you decide to take the additional risk of investing your money in equities that historically do tend to provide double-digit returns in the long run. Assuming an annual rate of return on 13.00% per annum you would have to save Rs. 36,328 per year for thirty years to achieve your goals. An example with a 15.00% return is provided as well.
Investors usually diversify their investment between debt and equities and earn returns that are commensurate with their asset allocations.