Financial planning is necessary to live a secure and comfortable life. It’s a process of evaluating your current financial state,determining your desired future financial position, and deploying the best methods to reach there. Having a proper financial plan would help you make sound financial decisions, and aid in meeting your goals and objectives quite easily.
A comprehensive financial plan has numerous benefits. Following are the five advantages of chalking out a financial plan.
Efficient management of income
Quite many do not have a control on their spending habits. This leaves them with very little cash to make investments or to save for a rainy day. Having a financial plan makes it easier to manage your income effectively. You may monitor your income, spending patterns and expenses, and budget your finances accordingly.
Higher return on investment
Through proper financial planning, you may invest a certain percentage of your income in mutual funds, shares, gold, Exchange Traded Funds (ETFs), and other investment vehicles. This would help you accumulate a corpus and aid in building wealth.
Security of the family
One of the most important parts of financial planning is ensuring that your family’s financial interests are protected at all times. Your financial expert may advise you to invest in insurance policies that provide a lump sum benefit in case of your demise. This will help your family meet daily expenses and fulfill other financial obligations in your absence.
Direction for your goals
You may wish to purchase a property or collect a sizeable amount for your retirement, but may not have the right pathway to do so. A financial plan helps you understand your goals, and provide the right direction to achieve them.
By budgeting your finances, you inculcate a disciplined habit of saving. The amount proves to be beneficial in case you are left unemployed due to an accident, or in case your loved one becomes critically ill. Financial planning provides peace of mind knowing that you have the necessary capital to meet any sort of contingency.
Tips to plan for various goals and selecting the right investment product
Financial planning helps you pen down your goals and creates a suitable pathway to meet these goals. However, it is important to understand that not all individuals may have the same financial goal. Some may wish to build a healthy retirement corpus, while a few others may seek to create an emergency fund.
Some individuals may have outstanding credit card bill payments or loan repayments, and may wish to completely get out of debt. Some may seek to gain coverage against contingencies such as loss of job, while others may look out to create multiple income streams.
There are numerous investment instruments available in the market, such as mutual funds, shares. Fixed Deposits (FDs), gold investments, real estate investment, post-office schemes, and insurance plans, among many others.
Based on your financial goals and preferences, you may select the best-suited investment vehicle.You may make the right choice based on your ability to take on risk. If you are risk-averse, you may opt for investment vehicles such as fixed deposits, Public Provident Funds (PPFs), and life insurance policies, among others.
If you are having a high-risk appetite, you may make investments in equity funds or Unit Linked Insurance Plans (ULIPS). Such instruments perform on the basis of movements in the stock market.
You may avail of higher returns if the stock market performs well and vice versa. You may, therefore, make a choice based on your risk profile. It is advisable to create a portfolio that involves investments in both low-risk and high-risk instruments. This helps not only helps to diversify risks but also aids in maximizing returns.
Another important aspect to take into consideration while deciding the right investment vehicle is your age. Individuals in the higher age group may seek stability in their returns. However, individuals in the lower age group have enough time on their side.
They are ready to take risk as they have ample of time to recover from any potential losses. They also have less responsibilities to shoulder, and hence, may be open to assume higher risks. Besides, young individuals benefit from the aspect of compounding, thereby receiving greater returns over a period of time.
For this purpose, it is highly advisable for millennials to invest in the equity market. Equity is one of the best performing segment in the market, and hence millennials may conduct a thorough research on well-performing shares and open a demat account for trading.
The key to mastering asset allocation is your age and risk-appetite. You may take these factors into consideration and invest accordingly. This will help you meet your financial objectives easily.