When you plan a trip, you usually plan several things such as mode of transport, accommodation, budget for the trip, duration of the trip, etc. Similarly, when you create a financial plan, you need to consider several things that will help you estimate the time and amount required to achieve your financial objectives. Financial planning might seem complex to new investors, but it is quite simple honestly. Let’s understand different thing you must keep in mind before you begin with financial planning.
- Benefits of starting young
Beginning early helps you realise the full potential of the power of compounding. The longer your investment duration, the higher are the returns from compounding. Compounding helps to multiply an investor’s returns exponentially. This helps you achieve your goals sooner.
- Importance of having an emergency fund in place
Emergencies in life come unannounced, so it is always better to be prepare for the worst. An emergency fund helps to face several contingencies in life such as loss of job, demise of a close family member, medical bills, home repair, etc. A good emergency fund must include a minimum of three to six months of an investor’s living expenses. You can further consider investing in these funds in high liquidity securities such as liquid funds or money market instruments.
- Utilise tax benefits properly
Several investors ignore the tax aspects of their investments and end up paying a huge chunk of their returns towards tax outgo. To avoid this, you must remember certain tax-saving investments that are available to an investor. Investments under section 80C are eligible for a tax deduction of up to Rs 1.5 lac per annum. In essence, you can save up to Rs 46,800 by investing in these tax-saving investments provided that you belong to the highest income tax slab. However, one must not invest in these tax-saving investments with the sole purpose of saving on tax. Your investment objectives must align with that of your investment. For instance, if you amplify your returns, you might consider investing in ELSS tax-saving mutual funds. If you wish to buy a term insurance policy, you might consider investing in ULIPs (Unit-Linked Insurance Plan). If you wish to create a corpus for your retirement you might consider investment options such as SCSS (senior citizen saving scheme), NPS (national pension system), PPF (public provident fund), etc.
- Being debt-free must be your top priority
Certain types of debts such as credit card debt and personal loans have a huge potential to take a huge chunk of your incomes in the form of high interest payments. Thus, your first step in financial planning must be being entirely debt-free. Or if not that, try to get rid of high-interest debt loans.
- Review review review
We cannot stress the importance of reviewing one’s investment portfolio on a regular basis. Investors are often in the dark that their job ends when they select the right type of investments for their portfolio. However, they cannot be more wrong. Financial planning is a continuous process. Reviewing your portfolio helps you to make changes to your investment portfolio as and when required.
These are some of the things you must keep in mind before you begin with financial planning. Two of the most important aspects of a sound financial plan are timing and discipline. In essence, begin with investing as early as possible, probably with your first pay cheque. Next, you must invest regularly and consistently to achieve your financial goals. Happy investing!