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5 Pillars of Personal Financial Planning
Financial planning is a broad topic and plays important role in everyone’s life. Unfortunately, this is untapped topic and not covered in any school/college curriculum. Here, we are going to cover main pillars of financial planning.
1) Protection before Investment
When one starts his or her career in job or business, the first question arises, how to start investment. However, investment is done for future use. One must protect self before starting any investment. Two important areas that need to be covered in protection are Health and Life.
Health Insurance: Cost of hospitalization is increasing every day, likewise diseases and accidents are increasing. One can lose his/her years of savings in one hospitalization. Hence, one must go for Health Insurance as first step in financial planning.
Life Insurance: After health comes life. We plan for dreams, but that dream can get shattered just due to death of the earning person. Hence, one must go for term life insurance upto 10-20 times of ones annual income.
2) Asset Allocation
There are various avenues where one can invest money. These are called Asset Classes. Following are the main asset classes:
- Debt: Fixed Deposits, Endowment Plans, PF, PPF, Guaranteed return avenues like Bonds
- Equity: Stocks, Mutual Funds
- Gold
- Property
One can distribute investment in various asset classes based on his/her age::
- Debt: One should factor his age as percentage in Debt. For example, if your age is 30 years, upto 30% of your investment should go in Debt fund.
- Equity: Average age of human life can be assumed 80 years. You can reduce your age from 80 to get %exposure in Equity. For example, if your age is 30 years, you should invest upto 50% (= 80- 30) in Equity fund and equity related investments.
- Gold: Gold has been termed as the best friend to contain inflation. Upto 10% of investment should go Gold or gold related papers.
- Rest 10% of your investment you can keep in other assets like Property etc.
3) Don’t put all eggs in one basket
We talked about asset allocation, however in any asset class, one must identify more than one option for investment. For example, one must not invest all equity portion in single stock or mutual fund. Keeping all investment in single place invites huge risk. So, one must learn to distribute investment in more than one avenue even under each asset class.
4) Start Early
This is one of the most important and least used aspect. Most of the people think about investment after crossing 35 years of age or after acquiring family. However, liabilities also increase with increase in age and one has to invest huge amount to meet ones financial goal in later stages in life.
For example, if a 25 years young person starts investing Rs five thousand per month and continues till the age of 60 years. Now, if another person starts at the age of 35 years and invests Rs fifteen thousand per month and continues till the age of 60 years. If you calculate, the first person who started at the age of 25 will have accumulated more wealth than the one who started at the age of 35 even with 3 times investment.
Summary here is that one must start investment as early as possible. Early start with low amount even helps one to enjoy the increasing income at later stage.
5) Reliable Advisor
Mis-selling is very common in financial market. Everyone is having one or more agents as their relatives and these over the nigh agents have half or no knowledge about financial planning. One is caught in bad investments through ill-equipped agents. It becomes too late by the time one realizes that his/her investment is too little or will not fetch enough returns.
So, selecting a proper financial expert is very key in financial planning. One must not get lured in the name of helping ones relative agent. You are investing to create wealth for yourself, not only to create wealth for your agent. Hence, select professional advisor, even if you are charged a fees for right advisory.