We learn by facing obstacles, and this pandemic has really shown us the mirror of why planning our financial needs and goals are essential. Financial planning is the process that helps you achieve the goals in your life and provides you a framework for avoiding contingency and financial surprises.
The earlier you start this process, the better you are prepared to tackle any emergency situations in the future. Financial planning also helps you secure your future after you retire.
Financial planning comes with objectives, framing financial policies, and ensuring that your scarce capital is invested in the appropriate place. Here are the 5 golden rules of financial planning that will help kickstart your investment for the future.
Golden Rules of Financial Planning
Knowing how to manage your money is the first step towards financial planning, and under money management, savings come first. You do not want to end up borrowing from your friends or family at the brink of an emergency. You cannot rely on a credit card either because the credit card is the most expensive form of debt.
Savings is not only for the purpose of emergency, but it is also required to meet your life goals like buying a house or saving up for your higher education. You need to save a minimum of 10% of your income, or you can invest in a liquid fund, fixed deposits, commercial papers, or in any fixed-income generating instrument.
Prepare a Balance Sheet
A balance sheet will help you determine what you own and what you owe. The difference between them will be your personal net worth. It is essential to note down your assets like bank balance, investments, and fixed assets along with your liabilities like credit card balances and outstanding loans. Your net worth should always be positive, but even if it’s negative, it will gradually become positive as you pay off your loans. It is also critical to own assets that will give you some monetary value rather than being a burden on you.
Personal Investment Portfolio
Creating an investment portfolio is an achievement towards wealth accumulation. A portfolio involves the distribution of all your investments into asset classes like equity, debt, and cash. You need to diversify your asset allocation to get maximum returns and become a long-term investor to accumulate a greater corpus. After creating a portfolio, check it periodically to assess any risk related to market fluctuation and keep your investment horizon for a long period.
Risks and Insurance
Your life and property are extremely vulnerable, and it is best to insure them both to avoid falling into financial jeopardy. Invest in a term insurance plan for higher risk coverage at a reasonable price but do not expect any returns from the insurance. Make sure that the sum you have insured is at least 10 times your annual income and before buying coverage, check all the policies that are available. You need to also have health insurance amidst the rising healthcare costs so as to avoid falling into medical debt.
It is essential to plan your taxes so that you can claim deductions, tax exemptions, and benefits to reduce tax liability. Be careful while you are doing this because you can fall into legal risks of tax evasion and avoidance. You can also invest in a diversified equity fund to avail yourself of more deductions.
If you are still unclear about where to begin, it is best to take help from a professional. Forming the habit of financial planning is really tough, but it is important to take the first step. Start your planning early and enjoy the benefits of compounding.