People wonder what different Financial Planners know about finances which a common man doesn’t know. Well, frankly not much. Financial Planners do not have a magic wand with them that suddenly they are going to change your current state of finances neither they can get you where you want to be. Rather they just know what is important in financial planning and how to be focused and consistent in following those basic things.
I am also a finance professional, so I can say I know a little bit more about personal finance than a common man. I also learn many new things daily and apply these in my own financial planning. Here I am sharing the basic 10 points of Personal Finance which will be helpful for you to frame the roadmap for your Financial Independence.
Personal finance is not rocket science: Common investor thinks that Personal Finance or Financial Planning is very difficult to understand but it’s not the truth. We can learn things if we develop an interest in it. Read and learn about personal finance to know it properly.
Cover your basics first: It is very important to set your monthly saving rate and stick to it, prepare a monthly budget, know about your spending pattern, and segregate in NEEDS and WANTS. Give preference to saving and then spending and know your cash flow.
Never mix insurance and investment: Common man makes this mistake often. They get trapped in the misselling of insurance agents and buy traditional plans such as whole life, endowment, moneyback, and even ULIPS. One should take Term Insurance for life insurance needs and mutual funds for investment purposes to create wealth in the long run.
Hedge life risks before starting investments: Many times retail investors start investing and neglect hedging the life risks. One should set aside an emergency fund equivalent to 6 months monthly expenses plus all EMIs in most liquid financial products. Take adequate term plan and health cover for self and all family members including parents apart from the health plan provided by the employer.
Always follow goal-based investment theory: It is very important to identify your life goals and invest accordingly instead of random investing. One should segregate their life goals in the short term, medium-term, and long term duration and invest accordingly.
Always invest according to asset allocation: It is very important to have different types of asset classes in our portfolio. Never be over-invested in a single asset class. Allocate your investible surplus(savings) in different asset classes such as cash, equity, debt, real estate, and gold according to your age and time to life goals.
Always follow self-risk assessment before starting investing: It is very important to know which type of investor are you. Whether a small fluctuation in the share market increases your heartbeats then it is better you stay away from equity. So before jumping in any Stock recommendation from friends and relatives see whether that suits your investment style or not.
Equity is only for long-term investments: It is very important that common investors should know that equity investment makes money only in the long run. If you have a 7+ yrs life goal adds equity to the portfolio. Never invest in any equity mutual fund just to see its last year’s performance. Mid and small-cap funds are good for 15+yrs life goals. For a shorter period stick to nifty funds, hybrid funds, and large caps.
Never chase returns instead focus on the Corpus required to be accumulated: Common man always runs after returns on the investments he wants to invest. Returns are not in your hand. What is in your hand is saving more, spending less, investing wisely, and controlling your GREED, and FEAR in investments. Focus on these things. focus on the corpus you want to accumulate and try harder to fund it seriously. Returns you earn on your investments should be considered extra. It is an ICING on the cake.
Knowledge and Discipline lead you to financial peace: I always believe in this sentence. If one gathers knowledge about Personal Finance and be disciplined about investing in the longer-term one can create wealth and have financial peace.