5 golden rules of financial planning
These financial tenets shall never change or become irrelevant. Follow them if you want to protect your finances against uncertainty.
Have a plan, be rich
This is, perhaps, one virtue that can neutralise the impact of various financial sins. A plan acts as a guide through your financial journey and, even if domestic and global upheavals dent your investments, it will help you get back on track. At the macro level, planning affects every aspect of personal finance, be it taxation, insurance or achievement of goals.
It can cut losses, enhance gains, and avoid the pain and panic of a financial or lifestage crisis. At another level, a plan is a simple matter of listing out your needs and wants, and deploying the money in right avenues so that you have it when you need it. As a first step, calculate your existing worth and identify the goals for which you will require money in the future. Calculate the exact amount required for each goal after factoring in inflation and the time horizon in which you want it.
Find out your risk-taking ability and then pick the instruments you want to invest in (asset allocation). Link your investments to goals and you won’t have to scrounge around for money when you need it. Build a plan the minute you are employed because you can invest without straining your finances and without the burden of responsibilities.
More importantly, it will help you gain from the power of compounding. So if you wake up to the need of a retirement kitty at 40, you’re likely to save much less than if you started at 25 (see graphic). It is likely that your planning will go for a toss in a market collapse like that of 2008, but will typically stand you in good stead through most ups and downs.
Secure your family & finances
Most people are so intent on investing and building assets that they forget to cover their risks. Since it’s crucial to secure your family and finances by creating an adequate insurance portfolio, this is the second constant that does not change with time. A majority of the people buy insurance to save tax and as an investment, with life insurance the second most favoured investment destination after fixed deposits, accounting for 25% of the wealth of small investors.
However, it’s important that you don’t mix your insurance and invesments. The base of your insurance pyramid should comprise pure protection plans. These cover the risk of death (term plans), health issues (medical plans) and accidents (accident/disability covers) (see graphic).
The amount of cover you take, be it life or health will depend on your lifestage, income, dependants and requirements. Next, consider insurance policies that can help you reach your goals. These include traditional (endowment) and child plans, and finally, buy plans that can assist you in creating wealth (Ulips). The other important insurance plans that you shouold buy are those that cover real estate and household content. These are quite inexpensive, with the essential covers costing you less than Rs 2,000 a year.
Never ignore taxes
Much like death, taxes will never go away. While rules and slabs may change from time to time, taxation itself won’t. In fact, it affects every aspect of your finances, from income and allowances to investments as well as the assets you buy or sell. So, stop ignoring or pushing it away.
Look at it as a way of reducing your losses and increasing your gains. Take the help of a planner or tax professional if you need, but start on time. Split it into three sections—taxsaving investments (deductions/exemptions), tax payment and filing of returns. Make a calendar for each because procrastinating will not only result in confusion, but also losses and penalties. Plan your tax-saving investments at the beginning of the financial year by calculating how to maximise exemptions and deductions under various sections. So if you are paying the tuition fee for two children, investing in the PPF, and having your EPF deducted from the salary, it is likely that you will exhaust your Section 80C limit of Rs 1.5 lakh and won’t need to rush into the last-minute purchase of an endowment plan or Ulip that you don’t need.
Go through the list of other exemptions and deductions besides Section 80C, such as those under Section 80D (health insurance premium) or donations and charity (Section 80G) to know how much more you can save. Make sure that you have claimed the tax-exempt reimbursements, such as medical or conveyance, from your employer by submitting bills and proof on time. Certain reimbursements like LTA cannot be claimed while filing returns if you forget to take them on time. Also, be clear about the way your investments are taxed so that you can buy and sell assets by paying minimal or zero tax, and can offset your losses against the gains in a particular year. Next, remember to make tax payments on time by checking the deadlines.
For instance, an individual assessee (other than corporates) needs to pay advance tax in three tranches by 15 September, 15 December and 15 March each year. If you fail to do so, you will be penalised 1% simple interest on the due amount per month. Finally, set yourself an alarm or reminder to file the return two month before the deadline to avoid the chaos and crashing website of the last few hours. Of course, you can do so later as well if you have already paid your taxes, but why wait?
Monitor your investments
Creating a plan and building a portfolio may go to waste if you do not monitor it periodically. A review is essential to mark the progress towards your goals and take corrective measures, if required. As critical as a medical check-up, you should monitor the investments on a quarterly basis for short-term goals, and annually for long-term goals. While some people display undue exuberance, checking twice a week or more, it is prudent to do it at longer intervals. In changing market conditions, an important thing to analyse is the asset allocation, which could have changed and will need to be rebalanced.
Selling something that is doing well and buying into a losing asset class might appear counter-intuitive, but in the medium and long term, a portfolio based on asset allocation has a better chance of outperforming the market. Next, one must look at individual performances of investments and remove the funds or stocks that have not performed consistently for more than four quarters.
Reviewing portfolios has been made easy by online portfolio trackers and money management websites. Valueresearchonline. com, for instance, offers a free portfolio tracker, which analyses asset allocation and even calculates your short- and long-term capital gains.
Be aware, stay alert
The more things change, the more this rule holds. A good financial plan not only means investing in the right avenues and monitoring the plan’s progress, but also ensuring that you don’t lose your hard-earned money to frauds, identity theft and sheer ignorance. Financial knowledge and caution can translate into higher gains and fewer losses for you in any market condition.
You can start by taking note of the various fees and charges that are straining your budget and reducing your savings. Whether it’s credit card usage or travel planning, banking or realty transations, make sure you don’t give away more than you should. Next, ensure you don’t invest in an instrument you know nothing about, especially when it comes to stock investments.
Most experts opine that mutual funds are a better and more secure way to invest in equity because your money is being handled by seasoned professionals. Similarly, it is essential to stay abreast of the new tax rules and investing schemes to maximise your savings. If you do not know the various tax deductions you can avail of, you are whittling away your savings, even incurring losses that you could have set off against your gains. Mis-selling is another pothole that can be avoided if you are well-informed about financial products, be it insurance or banking transactions.
Be especially wary of brokers and agents who are keen to take control of your finances, offer to fill up forms without your presence, real estate discounts that seem too good to be true or market returns that are incredibly high. Credit card fraud and online identity theft are two other areas that can result in massive monetary losses. Practise caution while conducting ecommerce transactions and be wellversed in the procedures that needs to be followed in the event that you are victimised. Being well-informed and practising caution are as good as an insurance for your finances as the life and health covers that provide protection to your and family and investments.