Personal Finance is not rocket science. It is just a checklist which needs to be followed. If everyone follows the following points their financial planning will be done automatically.
Set your goals: This step is the starting point of Financial planning. You should know what are your long term goals as well as your short term goal. Long term goal may include retirement planning and buying a house. Short term goals may include foreign/domestic vacation, buying a car, setting aside some money for higher education, etc.
Fix the saving percentage you want to save. When you are single try to save the maximum up to 50%.
Save before you spend. Create a separate account where you can transfer stipulated saving amount on the first day of the month from your salary account.
Make your monthly budget. Once you have an idea of what you spend in a month, you can begin to organized your recorded expenses into a workable budget. The budget will help you to plan your spending and limit overspending.
Set aside 3 to 6 months expenses as an emergency fund in liquid funds, bank FD or bank RD. Always keep it updated as your expenses increases. Consider Emergency fund as your expense, not your Investment.
Buy online term insurance plan early in life. The premium will be very less. Select maximum term possible. Insurance amount should be 10 to 12 times of gross income.
One should take disability rider and accident benefit raider of equal sum assured along with the term plan or separately.
Standalone health insurance plan of 5 lacs or a family floater as your base plan and buy a top-up health plan of 10/15 lacs for you and your spouse. This arrangement will save your premium outgo.
Investing without a goal means investing randomly which may not be sustainable and can be stooped any time if any emergencies happened. Goal-based investment helps to be focused and disciplined in investing until the goal is achieved.
While investing in equity you should consider building your portfolio under Core and Satellite Approach. In this approach, according to the 20 to 35 age group, 60% of equity investment should be invested in the good qualitylarge-cap fund and multi-cap fund. And those in the mid-40s should allocate 80% in Large-cap funds. The large-cap can generate 10 to 12% returns for SIP investments.
And rest 40% into the mid and small-cap fund for 20 to 35 years age group and those in their mid-40s should have 20% exposure. Mid and Small caps have potential in generating 15 to 18% returns. They can provide a kick for your portfolio returns. This arrangement will help to generate a higher return by minimizing the risk of a downward fall.
If you don’t have enough fundamental and technical knowledge of direct equity stock please refrain from investing in direct equity blindly. Instead, take the Mutual fund route. If you are new in the market start investing in Nifty ETFs, Index Funds or Balanced Funds.
Your 20% of the investible surplus should be invested in debt products for younger people and in mid-40s people should have 40% corpus in Debt products like PPF, good quality debt fund, and NPS.
PPF, NPS, and EPF are the best debt vehicle for long term wealth creation. For short term goal invest in debt mutual fund.
Tax planning needs to be done wisely. Try to invest 70% of 150000 in equity ELSS for long term wealth creation with superior returns and remaining in PPF for capital protection and guaranteed return.
Never invest in unproductive financial products for the sake of saving tax. For example never mix Insurance and investment with each other. Buy pure term plan for Insurance needs and invest in Mutual funds for wealth creation.
Never get into the debt trap. Please never take any expensive loans to fulfill your aspiration. The debt will hamper your saving.
Credit card: The credit card should be used very cautiously. Never roll over the credit card payment. The most expensive loan is of the credit card. So it is always better to use it prudently.
Keep reviewing your portfolio once in a year and alter your asset allocation as per major changes in your life.
Wealth creation is a long term phenomenon. Stick to your asset allocation for the long term. Don’t get panic about the short term volatility in equity markets. Stick to our SIP.
Last but not least please complete the nomination process for all your investments.
Knowledge and discipline in investing will lead to financial peace…..