A step-by-step approach called financial planning or financial management enables people or organizations to accomplish their objectives and efficiently manage crises. It assists in keeping track of income, expenses, savings, and investments to make one’s finances run smoothly.
A comprehensive strategy for managing your finances in the now and the future is financial planning. It serves as a guide, assisting in the achievement of objectives and maintaining readiness for monetary emergencies. A disciplined investment regimen can help you achieve all of your goals, whether they are for your first home, your children’s education, or your post-retirement corpus.
Risk management must come first when you start your investment process. Hemant Rustagi, CEO of Wiseinvest, explained the Dos by citing three components of risk management: life insurance, health insurance, and emergency savings.
According to Rustagi, the main objective of investing is to realize one’s personal and familial goals.
How to Manage Your Money
- Life insurance: While a person makes plans for the welfare of his family, life is unpredictable, and if that person were to pass away, those goals and desires would be impossible to realize. Life insurance comes into play at this point and assists by offering financial support, according to Rustagi. A tool for risk management is life insurance.
- Health Insurance: Due to the high cost of living in modern society, if a person stays in the hospital for five days, his or her finances for the following year or two would likely spiral out of control. As a result, Rustagi stressed the significance of having health insurance to cover your medical costs.
- Emergency Fund: According to experts, if someone doesn’t have an emergency fund, he or she may frequently disrupt their investing portfolio. Having the correct product is equally crucial, according to Rustagi. Take out a term plan for life insurance, a family floater for health insurance if you have a small family, and invest in a liquid fund to set up an emergency fund and keep it entirely liquid, advised Rustagi.
- Asset Allocation: This is the most crucial component of money management. One should be mindful of the reasons why they should invest in equity, such as retirement preparation and funding for children’s education. If the goal is short-term, such as a vacation or education costs, the money must be invested in safer vehicles. Equity and debt investments are viable options for the medium term, according to Rustagi.
- Save First, Spend Later: The financial expert advised against paying for things out of pocket first. Savings should come before spending. He advised people to set aside money from their earnings for investments first and to be dedicated to their ambitions.
- Start Investing Early: The expert claims that a person can take a risk while they are young. You can afford to make mistakes when you’re young since time is on your side. To beat inflation over the long term, one can invest in stocks and take risks. The ability of compounding is a significant advantage of stock investment, according to Rustagi.
Don’ts of Financial Planning
- Never Confuse Saving with Investing: According to Rustagi, saving money in the bank by investing is a mistake. Many people mistakenly believe that investing and saving are the same thing. Savings and investing have fundamentally different goals, even though both aim to safeguard the future and uphold discipline. Saving is the initial stage in the wealth creation process, but investing is what will contribute to wealth creation.
- Avoid Relying on Traditional Options: Investors shouldn’t solely rely on conventional investment vehicles like fixed deposits. We are exposed to two risks: inflation risk and capital risk. We are all concerned about the capital risk since we don’t want to lose all of our investment. Additionally, because long-term returns on traditional investment options are typically poor and subject to taxation, we disregard the significantly higher risk of inflation during this phase.
Therefore, taking into account tax and inflation, one will not receive a positive rate of return.