Financial planning is an activity to plan your income, expenses, and investments to build an optimal corpus that would fulfill your dreams that can be fulfilled via financial means, also called financial goals.
Be it about making sure that our children have the best education possible, to have enough for medical emergencies, to have a house of our own, or simply, that vacation that you have always wanted to take. These dreams remain dreams, unless we sit down and admit that these are goals, and understand achieving them needs planning.
Benefits Of Early Financial Planning
The moment you start earning is a good time to become financially responsible. It helps you achieve a few financial milestones:
To Develop A Habit
When you take control of your finances from an earlier age and start planning them, you can develop the habit of financial planning early on. This habit, later, helps you manage your finances better and create savings for your goals effectively.
To Save Affordably
One of the reasons why people don’t manage to save enough for financial goals is because they start much later in their lives. When you start late, you have to save higher amounts regularly to build up the desired amount. However, increased responsibilities and mounting expenses do not permit you to save a high amount of money and ultimately, your savings fall short of the mark.
Contrary to this, when you start saving early, you can save small and affordable amounts and create the amount needed. Moreover, when you are young, you have limited responsibilities and higher disposable income.
To Benefit From The Power of Compounding
The very savings you do accrues returns, which makes the savings amount bigger, which in turn accrues more, and so on. This compounding of returns works in your favour when you give your investments time to grow. When you start investing early, you can invest for a longer tenure. This investment tenure allows the compounding factor to multiply your returns exponentially.
For instance, let’s consider you invest INR 10,000 every month and the risk-free rate of return is 7% per annum. The targeted age at which you would need the invested corpus is 45 years.
Now, if you start investing from when you are 25 years old, the corpus accumulated at 45 years would be approximately INR 52.09 lakh. However, if you start investing at 30 years of age, the corpus would reduce to INR 31.79 lakh. So for compounding to work, you need to give your investments as much time as possible and that time is available only when you start early.
To Help Manage Taxes
The government helps you put your savings to use more effectively via avenues that help you save taxes on your income.
For example, Section 80C of the Income Tax Act, 1961, allows you to claim a deduction of up to INR 1.5 lakh from your taxable income. Similarly, if you buy a tax-saving health insurance plan, you can save taxes under Section 80D.
When you are aware of how you can allocate your money in a tax-efficient manner, you would be able to save tax and increase your disposable income.
How to Align Your Goals to Your Financial Plan?
This process is simple and just needs you to understand your requirements. Your goal-alignment checklist can look like this:
- List down your financial goals, preferably in order of their priority.
- List down the horizon against each goal.
- Estimate the amount that would be needed to fulfill each goal.
- Aggregate the total amount needed.
- Deduct your existing assets and investments from the aggregated amount to find out the corpus that you need to create.
Create A Fund
Ideally, you should create a separate and earmarked fund for each goal. Each “fund” would have a different timeline, importance, and a different risk profile and each of your needs should be thought through, prioritized, and then worked on.
For instance, if you are looking at higher education for your daughter, who is now 10 years old, you need to plan out basic costs associated with your expectations like a degree from a foreign college from a certain country and so on. Part of this money could be available with you now and part could be earmarked as savings for her.
Similarly, to meet your goal of buying a house, you may need to decide when, how, and where you would buy the property, and how much would it cost you.
Have an Emergency Corpus
Creating an emergency corpus is…