You must have known many people dreaming about being rich and successful. They might be engaged in one or more income generating activities to earn money. Getting handsome returns is the primary goal of course. But does a high earning job or business or profession mean a sound or stable financial well being? What if the gains are not invested properly or the money is used to gamble somewhere or kept inactive in a bank? What if there is no life insurance to take care of the family in the event of some unfortunate event taking place? Home loans, children’s education, later years of life etc. all should be planned out thoughtfully. Remember earning is different from financial planning. Financial planning inevitably requires a strategy. There might be some changes here or there depending upon one’s goal in life, but a few parameters never change as they form part of the overall financial planning universally.
Personal financial planning is a written analysis of an individual’s finances, including earnings,expenses, assets and liabilities. By doing this exercise you will be able to assess the feasibility of your personal goals and what all you need to achieve them, putting into monetary terms. Divide this plan on a monthly, quarterly and yearly basis. Modify the figures according to the changes taking place from time to time. For example, the vehicle loan gets over. Or you curtail the amount of housing loan by liquidating some of your investments.
‘Personal financial planning’ is the main focus of this article to make the readers understand the concept and also to assist while they do their own financial planning. Planning involves many factors like earning, saving and investing. How they can revolutionise your financial health is the central idea of this whole discussion.
Warren Buffett quoted it right-”If you don’t find a way to make money while you sleep, you will work until you die. “ Start acting today so that you don’t have to regret tomorrow. Don’t keep your money idle or waste it on unnecessary purchases. Make the most of it while you are able to do so.
Nobody is an expert and there is a possibility that you don’t know how to initiate the entire exercise. Don’t worry. Here is an attempt to make you well worse with the topic-
- Make and follow a budget: Personal finance has a lot to do with making a budget. Budget is something as good as financial planning as almost all the parameters to carry out your short term and long term financial goals are included here. If you are able to make a budget, you will come to know about some surprising facts about your spending pattern against your income. Once you start allocating the expenses, you can find out how much is left in the end. What is left is available to be invested or is it required to pay off your debts? Depending upon the answer to these questions you can efficiently allocate the funds into various investment options including PF, pension and insurance plans. Your investment portfolio is a very important thing that will help you get returns over and above your regular income. Now this is the only way to prosper-adopting an investment strategy to give you an all round financial support. Budget can also put a check on your expenses. If you invest through SIPs, a fixed sum will be needed every month towards that allocation. Automated investment plans can also put a control on your spending since the bank account shall get debited automatically. Right from electronics to a car or house, your necessities get reflected into your budget.
Budget/Financial Planner
Month: October Year:2021
| Income | Budgeted | Actual | Difference |
| Salary/Wages/Commissions | 100,000 | 100,000 | – |
| Dividends/Interest Income | 5,000 | 5,000 | – |
| Income from shares and mutual funds etc. | 5,000 | 2,000 | 3,000 |
| Total | 1,10,000 | 1,07,000 | 3,000 |
| Expenses | |||
| Rent/Housing loan instalment | 20,000 | 20,000 | – |
| Insurance premium(Health, life and other) | 2,000 | 2,000 | – |
| Electricity,water,gas,telephone bills,mobile bills, internet and T.V cable charges. | 5,000 | 6,000 | 1,000 |
| Municipal and other taxes | 500 | 500 | – |
| Milk,vegetables,grocery bills | 5,000 | 7,000 | 2000 |
| Children’s education | 5,000 | 5,000 | – |
| Petrol/diesel/other transport charges | 2,000 | 2500 | 500 |
| Medical expenses | 500 | 500 | – |
| Other expenses(hotel/restaurants/cinema etc.) | 1000 | 1,500 | 500 |
| Total | 41,000 | 45,000 | 4,000 |
| Excess of Income over Expenses | 69,000 | 62,000 |
The income in excess of expenses depicts the amount that can be saved by choosing various investment options. You can bifurcate them into short-term and long-term investments depending upon your goals. An emergency fund can be created out of this amount. On an average fifty percent of your take home pay is used towards living expenses, thirty percent towards discretionary and twenty percent towards future or old age planning plus paying off debts.
- Inculcate a habit of reading finance related tips/articles: It is quite possible that you have not taken interest in any material focused on matters related with finance. A layman might fail to understand the complex language of the terms used in financial news, articles etc. You may lack the knowledge about the personal finance field altogether.To understand the tactics of how the monetary world behaves, you should start reading more about them through short articles which are easily available on your fingertips. There are many apps, links etc available on the internet that regularly educate investors. Not only that, they provide round the clock updates on various important happenings in the financial markets worldwide. Take baby steps, read them and start learning about a few investing options, saving techniques, insurance, loans etc. This way you will surely find them interesting. Slowly you will understand many words, how they are interrelated and can be helpful in a methodical way. Shortlist those which are directly affecting personal financial matters. You will be able to evaluate their effect if the same get included into your planning. There are reputed financial advisors who are reliable. Knowledgeable friends and relatives who have exposure to the finance world can be a great help to suggest you some good reads.
There are courses on how to manage your money. You can learn about basics through online articles, courses, blogs, podcasts etc. or read newspapers specifically meant for it.
- Set your financial goals: If you are earning, you have some prospects. All of us have a ‘to do list’ on our minds when we start earning. Some want to travel, some want a nice house. Likewise a few want to save more and avoid unnecessary spending. Goals have a lot to do with what you do with your money. Personal responsibilities also play a big role. If you have dependent family members then you need to provide for their financial security in addition to your own. Retirement planning, education and marriage of children and such other considerations have a direct impact on one’s life goals. Thus, setting your own financial goals forms the pillar of the entire financial planning. Your income will get allocated according to these goals. Different goals at different stages of life need to be defined. A clear cut timing for each goal can further help in picturising targets correctly. Invest wisely by choosing the right investment options.
- List down your assets and liabilities: Now this is yet another very important step in financial planning. Make a list of all your assets and liabilities. Try to assign an estimated value against each of your assets. List down your liabilities. This way you can work out your net worth by deducting the liabilities from the assets. Add up the outstanding liabilities while summing up the total amount of liabilities. If your assets are more than your liabilities by a substantial amount, then that means you are in a better financial position. The effect of which will be felt when you make a financial decision later in your life like investing for a long term or taking risk to earn profits in the share market. An individual who has more financial responsibilities could be risk averse.
Current estimated Net Worth
| Assets | Rs. |
| Current estimated value full value of residential property | 65,00,000 |
| Vehicles | 5,00,000 |
| Savings Accounts | 1,50,000 |
| Stocks,Bonds,Mutual Funds etc. | 5,00,000 |
| Total short term savings in 2 years | 1,00,000 |
| Other assets | 25,000 |
| Total Assets | 77,75,000 |
| Liabilities | Rs. |
| Housing loan balance | 30,00,000 |
| Vehicle loan balance | 2,00,000 |
| Credit card dues | 15,000 |
| Other liabilities | 5,000 |
| Total Liabilities | 32,20,000 |
| Net Worth(total assets-total liabilities) | 45,55,000 |
- Arrange and file your important documents properly and keep them at a safe place: There are many important papers like insurance policy that need to be kept safely for later use. Your family members need to know where they are kept and also understand how they are supposed to be used in case of your absence due to some unforeseen event. The provisions that you make for your family will become useless if the documentation is not proper. In case important documents are not kept in a safe place, they can be lost or damaged. Afterall, they are the basic proof to make any kind of claim before any financial institution like a bank or an insurance company.
- Bank accounts and other related matters: Almost everyone has a bank account. It is a necessary place to keep your money safe. Both the businessmen and salaried people depend upon banking transactions. Due to digitization and other technical developments, use of various applications also depend upon receipt and payment through bank via mobile etc. It is easy to operate fewer bank accounts rather than handling a number of them. When you have several bank accounts, it is difficult to keep a track of them. The most used bank accounts should be kept active and the rest of the others can be avoided by consolidating them. Many people use bank accounts as a medium to save money. The amount that you need by way of an emergency fund can be safely kept in a bank. It is advisable to link your bank account with other important channels to carry out the maximum number of financial transactions. For example automatic debits in your account for investing on a regular basis in a particular mutual fund. Monthly bills can be paid through banks if you have opted for an automatic debit option to pay electricity, telephone and other bills. You can minimise physically going to banks, save your time and handle everything with much simplicity and speed when you use various online facilities provided by the banks.
- Retirement planning: Retirement planning is something which should be given due weightage just like other goals in your life. Getting a job, achieving your dreams, starting a family, are the primary goals of the majority of us. Similarly, creating a corpus for future life is also a need and a responsibility. During later years of life you might need to take care of your health more than ever before. The sources of income might be almost zero and regular expenses are going to be present along with an added inflation factor. Taking all contingencies into account, you should start saving for your golden years. Create a fund that is capable of meeting all your requirements after your retirement. And this will not happen overnight. You have to keep contributing regularly towards this retirement fund. There are many schemes that may help you allocate a part of your income towards retirement corpus. All you need is to save and maintain a habit of setting a particular sum of money for your future. Also do not get tempted to pull out of this fund when there is some urgency. As far as possible, keep this fund intact. Rebuilding this fund will become challenging once you start ageing.
Age today: 35 Age of retirement: 60 Years to retirement:25
| Retirement Income | Monthly (Rs.) | Yearly (Rs.) |
| Government or other pension income | 20,000 | 2,40,000 |
| Rental Income | 15,000 | 1,80,000 |
| Fixed deposits/Shares/Mutual Fund Income | – | 1,00,000 |
| Income from other retirement schemes | 5,000 | 60,000 |
| Total | 40,000 | 5,80,000 |
Compare future monthly as well yearly income against your current income and expenses. Does the income look sufficient to pay your bills after adding an inflation factor to the amount of expenses? If not, you have to spare more money for your retirement fund. Salaried employees get gratuity too. Considering that as an emergency fund, it has been excluded from the calculation here. For people other than salaried class, an equivalent provision needs to be made. Few of the expenses like shopping and travelling shall reduce to a large extent when you grow old. But medical and other healthcare expenses will rise. The expenses needed to run your daily routine are inevitably going to be there. Save and invest accordingly.
- Protect yourself through an insurance policy: Insurance is needed to protect not only your health but also your life. There are both health and life insurance to ease difficulties to get equipped for life’s toughest challenges. One must provide for all contingencies by taking a life insurance policy. Don’t forget to discuss the same with your family. The nominees need to know about the process in case of death of the policyholder in the family. The documents and other details should be made known to them. Similarly there could also be a cover for valuable assets possessed by an individual like insurance for shop/office/house property in case of fire or other damages. Ensure that you are protected for all your risks.
- Make a Will: Estate planning is also something which is not given due consideration. The legal complexities involved could aggravate in case of death of an individual. The survivors may end up getting divided and disputes might arise when there is no clear cut distribution of assets among them. It is better to make a will and change it whenever you feel necessary to do so. You can get legal assistance if required. Estate planning experts or attorneys can help you make your will.
- Provident Fund/Pension Fund contribution: Provident fund is a very viable tool when it comes to your retirement planning. Even in case of emergencies the fund can be used subject to fulfillment of certain conditions. Both the employees and the employers contribute towards this fund. You can voluntarily contribute towards a public provident fund account as well. Alternatively or in addition to this contribution, you may also put a certain sum of money aside and invest into a pension fund account. Pension fund accounts will take care of you during later years of life. And preferably do not touch this fund as it is the only financial support when you grow old and your monthly income stops. The National Pension Scheme is a very popular pension plan if you are thinking about considering one. Insurance, provident fund and pension schemes are the three important pillars meant for your future.
- Payoff your liabilities: Repayment of loans and other credits should never be taken lightly. If you get any extra income, they try to pay off your liabilities fully or partially. Loans take quite a long time to pay off. Interest burden usually constitutes a major component of your loan. So if you are able to shorten the period by paying it off early, you can avoid paying heavy interest. Timely payment is very important. If the deadlines are not met, it could have a long term impact on your credentials. Once the credit score gets affected, it will damage your future probabilities of getting finance easily. Credit cards must be used carefully, minding their limits and if you avail of this facility it should not result into a provocative buying habit just because you are given credit for a very short period of time.
- Create an emergency fund: Emergency funds will pay off your immediate expenses or some large amount of expenses arising due to some unforeseen emergencies. In a case when someone falls sick or there is some accidental loss of money, emergency funds are a life saviour. Set aside a part of savings every month and keep it in a savings account or in cash. It should be liquid and sufficient to take care of at least one year’s monthly bills.
- Tax Planning:Tax management is another spectrum altogether. Those who have taxable income sometimes do not know about ways to save tax. Read about them. Consult a tax expert or a chartered accountant to help you out. Be regular while filing return of income. For example if you are paying more taxes, you can plan to get a housing loan to reduce taxes. Learn about various exemptions and deductions that the Income Tax Act permits. Tax planning will leave more money in hand.
- Be a rule breaker for a while: When you are earning well, saving and following the budget while accomplishing your goals, you deserve a few breaks too for all the hard work you have put in. You may as well decide to cut your savings a bit and pay off some liability instead. Take small vacations from work and enjoy it with your family. This way you will be motivated to continue doing great work for yourself. Feel proud for ticking off a few of the goals on your list.
Thus, have a look at your current financial position, make goals and think about the ways to achieve them. If you fail by adopting a particular way, choose another option. Take action, revise and reevaluate whenever required.
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Smrutirekha Bhoi