Financial Planning: Start early and be rich

High salaries, fast lifestyle and latest gadgets are normal characteristics of the life of Indian youth in recent times. High economic growth rates have thrown up tremendous set of opportunities to earn and show talent. As a result the youth is working harder, smarter, earning a lot and spending it leisurely. Indeed a great situation to be in.

So, how does financial planning come into picture? How many of the young workforce out there has heard about the magic of compounding? Chances are great that most of them will be unaware of this vital component of a secure financial future.

Investing right and investing young is the mantra of accumulating wealth over a period of time. Even a small sum of Rs.500 invested early in proper investment vehicles will result in a big fortune over time.

It is ironical but true that it is not very uncommon to find young professionals having good salaries, with little or no financial security & ridden with all sorts of debts. Lack of knowledge regarding importance of investing early and various types of investment opportunities available takes it toll on the immediate as well as long term financial future.

For example, how many of credit card holders know that the interest rate charged on the cash withdrawal or outstanding balances using it carries an interest rate of around 40%! Credit card is visualized as easy money and cash withdrawals, paying only the minimum due is rampant practice among credit card holders and this is one of the major reasons of falling into debt and worsening credit ratings.

How does financial planning help in such a situation? First, it helps you understand the pros cons of various financial investment products like term insurance, ulips, fixed deposits, mutual funds, stocks, real estate etc. and helps you choose one according to your risk profile. Secondly, it helps you enumerate your financial goals- both short term and long term and plan your investments in such a way that you are able to fulfill your financial goals. It also helps you understand the cost of borrowing via various financial instruments and their impact on your financial future.

Starting early on the right financial track can be the difference between a successful and rewarding financial future or a debt ridden and insecure life full of financial difficulties.

Financial planning: It pays to start right

Contrary to popular perception, financial planning involves much more than mere budgeting and is definitely an exercise which requires expert attention. Given the immense complexities of life, a complex financial marketplace, multifarious investment instruments, multiple short term and long terms financial goals, planning for a safe and worry free financial future is not an easy job.

There are many steps that go into the making of an efficient and truly effective financial plan. Proper goal setting and assessing one’s correct net worth are two of the most important principles of any financial planning process.

The first step is often the identification of the short and long term financial goals. One thing that should be kept in mind while deciding on financial goals is that the more tangible and precise the goals, the easier it is to plan for them.

Short term goals can be the things that you want to accomplish within a shorter time span say 3-5 years, like buying a car or a vacation etc. The long term goals have to be achieved over a period of 10 to 20 years or more like planning for daughter’s marriage, kids education, retirement planning, buying a house etc.

Assigning priorities to goals is another major thing that one should not overlook. Privatization of your goals will help you allocate your valuable financial resources in a way that is most profitable and allows you to accomplish the more important ones. For example, if you owe a huge credit card bill, it should be one of your priorities to get rid of this high interest debt before going on a vacation.

After the process of goal setting has been done, one needs to assess his current situation and get an accurate estimate of his or her existing net worth. This will require the listing of all the assets and liabilities one owes. Assets can be your bank balance, investment in stocks, mutual funds, gold, property, insurances, vehicles etc. And liabilities are the loans to repay (they could be home loan, personal loan, credit card debt, car loan).

Begin by estimating the value of your entire assets. The next step is to get an idea of the debts or liabilities you owe and subtract your liabilities from your assets. This will help you arrive at your net worth.

This exercise will give you a clear picture of what you have and what you owe. As a first step towards correcting the financial situation it is always better to get rid of costly debts such as credit card bills, personal loans, car loans etc. as soon as possible.

Why do we need financial planning?

There are at many reasons that necessitate the need for financial planning in every body’s life. Listed below are some of these, which will help you understand the importance of a good financial plan.

Prepare for financial emergencies

Life is full of testing times, and in almost every such situation having sound finances really help. Critical illness, accidents, death etc. limit or reduce our earning abilities. Having a corpus will help eliminate the pains associated with these emergencies to a great extent.

Get rid of debt

A good financial plan has a detailed cash flow analysis and takes into account the income, expenditure, life’s goals, and net worth. And if you have any debts, they are also taken care of. Good financial planning will help you eliminate high cost debts like credit card and personal loans as soon as possible.

Proper retirement planning

Retirement planning is a definite priority with every financial plan. Building a retirement corpus with proper investment advice and having assets that prepare you for a risk free and desired post retirement life, is not possible without a proper financial plan.

Creation of wealth

Financial planning creates a focused and systematic approach towards attaining life’s financial goals. A good financial planner will identify proper investment options for you, which will help you grow your money in a right way.