Financial planning leads to financial wellbeing. There is no doubt that when it comes to your personal finances, preparedness and a thorough analysis of your earnings, spending and savings is the foundation to living well and achieving your life goals. As is often the case with us all, short term gratification cheats us of long term fulfilment and peace of mind. Especially when it comes to personal finances, we tend to make excuses for not saving and dealing with our financial obligations head on as there is an increasing uncertainty about what the future holds and if we may ever be truly prepared for it.
This type of thinking only helps justify short term spends on things we don’t necessarily need. It also leads to a cycle of overspending, saving little, borrowing and then spending more. The more the situation gets out of control, the less likely you are to want to take control of it, resulting in a state of complete denial till catastrophe in the form of a financial emergency strikes.
It is never too late to plan your finances. Simply putting pen to paper or speaking with a financial advisor will give you much clarity on (i) saving (ii) investing (iii) charting your life goals.
Here are a few things to think about when you start your financial planning journey.
- Financial Goals
What are your financial goals? It is the first thing you have to ask yourself. Here are a few prompts to help you answer this all encompassing question:
- When do you see yourself retire?
- What are some non-negotiable goals you hope to achieve – owning a home, owning a second home, study abroad, taking a sabbatical, so you can travel for a few years
- What are some smaller goals (more flexible) that you hope to achieve – have a holiday once a year, owning a car, renovating your home, etc.
Thinking about what you want to do with your life is the first step in helping you understand how much money you need. When this happens, you are able to create timelines for these goals and realistic expectations of when you can hope to achieve them.
Debt is not always a bad thing. Often taking out a loan to make a large one time purchase such as a car, a home, or an education can be more sensible than dipping into your investments or savings. However, if you buy things on credit regularly, debt can lead to an ugly financial situation. Financial planning allows you to take stock of your outstanding debt and set deadlines for when you hope to clear it. It also forces you to consider if the purchases made on credit can be avoided entirely. Debt is a burden. And the sooner you become debt free, the easier it is to plan retirement, savings and accomplish long and short term financial goals guilt free.
A high income does not guarantee high savings. How you save is a result of tracking your expenses, budgeting and spending sensibly on things that you need first, and then on things that you want. There is a rule of thumb that indicates that at least 30% of your monthly income should be saved. What are these savings for? The savings can be invested in a multitude of financial instruments and fixed income products to help you achieve your financial goals.
Investing money means taking money from your savings account and putting in instruments that offer higher interest on the money than your savings account. This is where your financial goals will act as a road map to guide you to the right investment products and the tenure for which you need to stay invested. Investment is tricky but not complicated. If you have clarity on what your financial goals are, investing becomes a simple, straightforward process. Investments also include health and life insurance, car insurance, etc., assets that ultimately ease the financial burden of losing a loved one, sudden ill health or an accident.
Also Read: Benefits of Investment in Stock Market
- Retirement Plan
At what age you hope to retire or, in other words, at what age you will stop earning a fixed salary is a hard hitting question. It is hard to tell what the exact age may be or where or who you may be with. But even ball parking this figure will help. A retirement plan will allow you to allocate funds for a certain time in your life when your priorities may be very different from what they are today. For example, funds for medical and health-related expenses, travel, renting in a retirement community, etc., are the type of expenses you will be looking at for that phase of your life. Part of your investments can be invested in secure, long-term financial instruments or investments that will give you fixed income post-retirement.
- Emergency Funds
An emergency fund is a pool of money that can be availed of in case of an emergency. While you may have your insurance in place, an emergency fund is there to safeguard you against unforeseen circumstances. Part of your savings should be attributed to this fund. This portion of savings will not be locked into long term investments but can be invested in an instrument that offers easy liquidity.
Conclusion: Financial wellbeing and planning is no easy feat. It takes time and is often a dynamic process as your priorities, jobs and life circumstances change and evolve. But being intentional about it and putting in some work towards having even a broad framework in place will help tremendously. Everyone needs someone reliable to help them navigate financial planning. Dhanush is geared toward making financial planning simple and stress-free. If you are just embarking on the financial planning journey, you should explore what Dhanush has to offer.