You must have loved Disney character “Uncle Scrooge” who gets to dive in his gold coin pool. Though, this seems impossible, you must have dreamt about it. This lets you think if your destiny will have such a turn where you would invest at least a percent of his wealth. Well, we are not sure but we will help you get richer than you are already. Let’s see how it can be achieved through efficient financial planning.
It’s not just about building up your wealth
Oh! Surprised? But financial planning is not really about only investments, savings and wealth building. Financial planning is the overall planning for the financial aspect where you will consider
- Financial leakages and loopholes
There are many gaps and variances from what you want to what you need. Financial planning will recognize and address all those issues which need immediate attention to stop draining your money out unnecessarily.
- Poor risk management
When you invest in gold where the prices are too high or enter in stock market at bullish trends, your risk appetite and risk magnitude of these instruments will vary to a greater extent. Financial planning will help you assess your risk appetite and invest accordingly.
- Wrong decisions
Well, if you are not those who afforded too many insurance policies following the persuasion skills of the agent! We all make mistakes in our financial matters, but key to successful financial decisions is to take corrective action before it’s too late.
Think about your nightmares
Well the biggest financial worries are that whether you will be able to receive enough when the liquidity is required for e.g. health care expenses, education expenses, etc. Hence, plan A for financial planning is to eradicate or reduce the impact of inflation and taxes by
- Either accommodating the inflation factor in your returns expected or
- Investing in such instruments which have already considered and factored their future returns to suit the inflation effect
The worst nightmare of waking up to insufficient funds in the time of need. Efficient financial planner in Mumbai will help you to reach your financial goals, be it debt eradication or better retirement planning etc.
Power of compounding
Financial planning introduces you to the concept of compounding, which is like tree growing from a seed. The compounding growth effect will multiply what you have in your kitty. Where you have invested Rs.10000 @ 10% p.a., you will get interest for 1st year amounting to Rs.1000. However, from 2nd year onwards till its maturity, you will get interest on Rs.11000 (10000+1000), where interest for year 1 is reinvested and so on. Compounding grows your money and returns on money invested, because money will grow geometrically. Compounding hence, will be aiding factor which will need you to start early to reap the maximum out of your investments.
Asset Allocation and Diversification
Never keep all your eggs in one basket, so are we told by our elders! This principle applies to our financial planning as well. The concept of systematic risk stems from here. Systematic risk is an inherent risk of the financial markets and economy, however, unsystematic risk is the one which can be reduced or eliminated by diversifying. As a norm, investors should diversify in order to stay protected from the seasonal ups and downs, sectoral development or concerns etc.
Asset allocation will depend on various factors like
If you are an early starter, then you would probably go for higher equity exposure which would render greater returns, but which also possesses greater risk. Such type of risk can be borne only at young age. However, at age of 40, you would prefer balanced approach which will basically maintain your earnings and plan for retirement.
- Risk appetite
A conservative investor would put more in stable instruments like government bonds, bank fixed deposits as opposed to an aggressive one who will prefer more equity participation in his portfolio.
If you are saving up for your retirement and have started at an early age, then you should consider more of equity participation up to 60-70% in your portfolio. However, if you are considering health care expenses to be covered, then a suitable health insurance plan is what you will need rather than investing in mutual funds.
- Tax management
Tax planning is an important aspect of financial planning and is to be considered most importantly if you are in higher tax brackets or nil tax applicability. If you are in higher tax brackets, then it may be pertinent for you to invest in tax saving and tax free instruments. However, if you are from lower or no tax brackets, then you can consider any instrument without having concern to tax aspect.
Risk management is the result of carefully crafted financial plan which will lead to wealth building as well as reduction of losses due to bad decision or financial loopholes etc. When you expect to derive maximum benefit of compounding, you have to also keep in mind the fact that losses in the way will reduce the compounding effect to a great extent. Balancing both defensive (stable and secure) and offensive (volatile and most rewarding) investment instruments in the portfolio, would prove a great risk management approach. This will ensure that you will have a regular income or stable corpus simultaneously, while you have most volatile instruments rendering their best returns along the way.
Retirement planning and succession planning
Any person would prefer to pay by himself rather than depend on their children. This has surfaced the need for retirement planning which allows the person to afford the ever increasing health care expenses, the routine household expenses like grocery, electricity bill etc. and any emergency needs, even after retirement. Retirement planning is particularly very important for those working in the private sector who so not have the aid of pension post retirement. Financial planning includes retirement planning as part and parcel and encourages to save for the same at an early age. Succession planning comes through only after retirement where you have sufficient funds and want to leave something more than just love for your loved ones.
So rest assured, if you want to get rich, financial planning is the way to go for. It would include recognition of objectives, asset allocation, crafting of actual investment strategy etc. However, periodic revisiting to such strategy would ensure that your plan is updated and on the lines as you determined.