In the world of finance, the difference between profit and loss, wealth and liabilities, affluence and poverty, is, to a large extent, attributable to knowing. Financial Planning means knowing and acting on that knowledge.
The tough thing about financial planning is it needs to cover a lifetime. When things around us are changing every day, every time, its difficult to foresee such a distant future. The right thing to do is have a plan clearly specifying what we want to achieve in life and the road map to the goals could be reviewed and the value of the goals re-calibrated regularly.
The key to successful financial planning is managing the right amount of savings and putting them to the most productive use. Is there a simple formula to ensure effective financial planning and safeguard your portfolio from ‘accidents’?
Here is a checklist:
1) Start Early: Financial planning does not help you if you want to earn money suddenly. There are no quick-fix solutions to managing your money other than starting early in your life. Smart people start when they get into their first job. Better late than never. Failing to plan is to planning to fail.
2) Think Long term: Behaviour patterns change gradually. Your saving habits or the returns you get on your savings should have a long term orientation. Long term means atleast fiver years and above. Money grows steadily and significantly in the long term due to the power of compounding.
3) Save regularly: No matter what amount you save, saving month after month is important. It’s the rhythm that gets you the desired money
4) Be reasonable : When you set up your goals, be specific and realistic.
5) Protect the downside: the best way to protect against downside is to spread your investments across different categories so that if one goes down the other goes up. Choose your investments that match your risk appetite. Don’t forget to regularly review, rebalance and recalibrate your portfolio to align it to the changing financial conditions.
6) Account for inflation: whatever you save, wherever you invest, your net returns are impacted by inflation. Your expenses grow significantly over the years, even though your needs don’t, because of inflation.
7) Do things that are good for you: do not follow your neighbour. His financial circumstances are different from yours.