Some individuals follow a return-centric approach to investing. They select mutual funds based on returns over the previous one and three years to chase returns. However, that is not the appropriate strategy. Identifying and investing in your financial objectives is the appropriate strategy. It keeps you focused on your investments for the long term till the goals are achieved. The personal financial planning journey can help you map all your financial goals, invest towards them, and review them till they are achieved. We will learn what personal financial planning is and how to implement it in this article. What is Personal Financial Planning?
The process of investing in a systematic manner toward a person’s financial objectives and regularly reviewing those objectives until they are met is known as personal financial planning. Every individual’s needs are different, and hence, their financial goals are also different. There is no one solution that fits all. Hence, the individual should work with an investment expert for personal finance advice. They can help an individual with a customised goal plan as per their requirements.
The Personal Financial Planning Process
The personal financial planning process involves streamlining an individual’s income and expenses, and investing a part of the income towards financial goals. It is done by selecting appropriate financial products and investing in them regularly. The performance is reviewed regularly till the financial goals are achieved.
The steps that go into personal financial planning are as follows: 1) Analysing cashflows
The process begins by making a cash flow statement by listing all the income sources on one side and the expenses on the other side. If your cash flows are positive (income is more than expenses), it is a good thing and you can get started with your personal financial planning journey. If the cash flows are negative (expenses are more than income), you should work towards making them positive.
2) Amount of wealth The next step is to make a networth statement by listing all the assets on one side and the liabilities on the other side. Assets are what you own and liabilities are what you owe others. If your networth is positive (assets are more than liabilities), it is a good thing. You should work toward making it positive if it is negative (liabilities are more than assets). 3) Budgeting
Implement a budget to allocate income to spending, savings, and investments. You can begin by using the 50/30/20 budgeting strategy. It allocates 50% of the income towards needs, 30% towards wants, and 20% towards savings and investments. If you can invest more than 20% of your income towards financial goals, it is better.
4) Making plans for goals List all your financial goals and classify them into short, medium, and long-term goals. The investment time horizon ought to serve as the basis for the classification. The classification also influences the selection of financial products for investment. For example, an individual should invest in fixed-income products for short-term financial goals. For medium-term goals, hybrid funds are recommended, and for long-term goals, one should consider equity mutual funds.
5) Investing in tax-efficient products
While choosing financial products for investing towards goals, an individual should make the most of the tax benefits available. For example, some financial products qualify for a deduction from taxable income under Section 80C of the Income Tax Act. The maximum deduction allowed in a financial year is the amount invested or Rs. 1,50,000, whichever is higher.
Similarly, on redemption/maturity, the income from some financial products is tax-free. The tax rate on other products may differ depending on the financial product’s type, holding period, and format. An investment expert can guide you on investing in tax-efficient financial products.
6) Estate administration You work hard to build financial assets. However, if you pass away too soon, you don’t want your loved ones to rush to get their hands on your assets. Hence, it is essential for you to do estate planning by making a will that ensures the smooth transfer of your assets to your intended beneficiaries after your demise.
7) Emergency fund and insurance
While investing towards your financial goals, it is important to be prepared for unexpected financial emergencies, or else it can derail your financial planning journey. You should build and maintain an emergency fund with 3 to 6 months of expenses.
All income earners should purchase a term insurance plan. In the event of your untimely death, it provides your family with financial protection. You should buy a family floater health insurance plan with an adequate coverage amount for all family members.
