Having a stable income is essential in today’s modern world. These days, it doesn’t even mean having enough to get by daily without seriously struggling to meet basic needs. Managing your money well now and in the future is crucial in today’s world. The pace of life, job insecurity, and rising inflation rates (which degrade the value of money) all contribute to making financial planning a top priority.
Most people spend their lives working to make money and putting money away but often neglect the third, most crucial step: financial planning, or money management.
To create wealth and achieve one’s goals, financial planning requires an understanding of one’s present and future earning capacity, an analysis of one’s future financial requirements (such as purchasing a home), and a plan to do so following one’s tolerance for investment-related risk.
Also, the market and people’s requirements are always shifting, so financial strategies need to be adaptable.
Importance of Investment Planning:
Investors frequently misunderstand that they may obtain financial security by simply saving money alone. But it’s not enough to save. Assume a 75-80-year lifespan for the average person. During the first 20 to 25 years of your existence, your parents are responsible for providing for all of your basic requirements. When you’re working, you’ll have to take care of the needs of your family (spouse, children, dependent parents), as well as save enough to cover your own needs for 15 to 20 years of retirement. Typically, you’ll spend 35 years in the workforce.
For long-term financial success, your money must rise faster than inflation. Inflation diminishes the purchasing power of money. The cost of education, medical care, and other necessities is rising at a far greater rate than the Consumer Price Index (CPI). It’s going to happen, and you must be prepared for it. In addition, as incomes rise, people’s lifestyles shift, necessitating greater spending.
Changing your lifestyle once you’ve become used to it can be difficult. You’ll need a lot more savings if you want to be financially secure and retain your current lifestyle. These problems necessitate a thorough knowledge and understanding of financial planning, and you should begin saving and investing as soon as possible in order to achieve all of your goals.
Financial planning is essential for everyone because it aids in achieving current and future goals and gives much-needed financial security in the face of unexpected events. A high-inflation economy like India erodes wealth, and financial planning can help to grow money and safeguard a portfolio from these recurrent erosions.
Diversification in financial planning also aids in harnessing the power of compounding and lowering the risks associated with a turbulent market setting.
Many concepts and activities are involved in financial planning, including evaluating the existing financial system’s investment prospects, creating an optimal asset allocation/portfolio mix, and keeping track of and reviewing the investments.
Steps of Investment Planning:
Define Current Financial State and Financial Goals:
Individuals must have a firm grasp on their current financial situation to know what they may expect to make and spend. The results of this study will disclose the annual cost of living and the amount of money that can be saved (after paying all of one’s bills) or invested. When investors have a good sense of their present financial situation, they must analyze their financial needs and ambitions.
Typical objectives include purchasing a home, saving for a child’s education, and preparing for retirement. In addition to determining the needs and goals, it’s important to determine the resources and time frame needed to accomplish them. Investments might be short-term (less than a year), medium-term (one to five years), or long-term (more than five years).
Analyze the Risk of Profile:
Analyzing an individual’s risk profile is a vital component of financial planning; remember that each asset class has different risks, such as the market’s volatility and credit risk, liquidity, and interest rate risks. In every investment, there is a degree of risk involved.
A person’s risk-taking and risk tolerance must be assessed while investing in higher return asset classes (depending on the purpose, time horizon, income level, and age) (capacity to lose some or all of initial and subsequent investments in exchange for greater potential returns).
For example, a person over 40 with a steady long-term income stream can consider investing a larger amount of their portfolio in risky assets like stocks than a person of the same age with a less reliable long-term income flow stream.
Pick the right asset allocation mix:
Equity, fixed-income (debt), and cash and equivalents have traditionally been the three most common types of investments. Although non-traditional assets like gold and commodities carry more risk than regular assets, they can still provide substantial profits. Diversification advantages can be maximized and minimized by distributing capital across various asset classes.
Once an investor has decided on various asset classes, they must construct an asset allocation plan specifying how much money they should invest in each key asset class. According to an individual’s risk-return profile, a proper asset allocation plan involves allocating the investor’s excess among several asset classes.
Traditional and non-traditional investment classes are covered by mutual funds in India, making them a suitable platform for investors while also providing the benefit of expert management at reasonable rates.
Individuals must have a disciplined approach to investments in light of the current market volatility, with the help of the methods outlined above. Aside from that, people should remember the basic modern-day adage: Start Early, Invest Regularly and Stay Updated.