Easy Steps to a Healthy Financial Life
By pfnadmin | PersonalFN – Wed 29 Feb, 2012 10:37 AM IST
Did you know that in 5 simple steps you can gain
not only full awareness but also complete control over your financial
life?
Let's see what these steps are:
Let's see what these steps are:
1. Know Where You
Stand
Unless you know what your current financial situation is, it might be difficult for you to know what you want to work towards achieving. Often people are unaware of what assets they own.
Unless you know what your current financial situation is, it might be difficult for you to know what you want to work towards achieving. Often people are unaware of what assets they own.
For example, a recent experience with a 33 year
old client went something like this:
Client: "I have no assets as such, so my
financial plan should be only based on building up assets to achieve my goals.
Luckily I also have no liabilities so we can have a clean start on my plan"
Planner: "OK, let's go through this step by step
and we'll see what exactly your current net worth is. Do you currently have a
PPF account?"
Client: "Yes... I should have about Rs. 15 lakhs
in it so far, but this was started for me by my parents when I was a minor."
Planner: "If the account is in your name, it
becomes your asset. What you use this money for is then up to you and your
family to decide. How long have you been working?"
Client: "Exactly 10 years now."
Planner: "You will have built up a significant
EPF corpus as well in that case. Have you been contributing the minimum Rs. 780
per month or have you been contributing 12% of your Basic?"
Client: "I originally contributed 12% of my
Basic, but I switched jobs about years ago and went to Rs. 780 per month
thereafter..."
Planner: "So you have PPF and EPF. You must have
been making tax saving investments into mutual funds as well?"
Client: "Yes every year I invest about Rs. 20,000
to Rs. 30,000 in some tax mutual fund scheme..."
...and so the conversation continued. By the end
of it, the client was surprised at how much he was actually worth, with just
haphazard absent-minded investing. He was also surprised to note that the credit
card outstanding balance counted as a liability and had been previously unaware
of the very high interest (almost 18% p.a.) charged on the outstanding
balance.
Only when a client knows where he stands, can he
understand how to proceed.
2. Know Your Cash
Flows
This is an interesting exercise.
Take a pen and paper and on one side list all your incomes i.e. salary, business, rental income, etc. A lot of individuals have one primary income stream i.e. salary.
Now on the other side list your expenses, clubbed into broad categories.
Some of these will be guesstimates.
For example various expense categories can include rent, groceries, household maintenance, travel, fuel, utilities i.e. electricity, gas, cable, cellphone, and discretionary expenses such as eating out, shopping, entertainment etc. You can even factor in annual travelling expenses, divided by 12 to take them on a proportionate monthly basis.
From your income and expenses you will arrive at your monthly savings figure each month. Wherever possible, see if you can cut down on your expenses and channelize this extra saved amount towards your contingency fund (at least 6 to 24 months expenses) or your goal based investments.
This is an interesting exercise.
Take a pen and paper and on one side list all your incomes i.e. salary, business, rental income, etc. A lot of individuals have one primary income stream i.e. salary.
Now on the other side list your expenses, clubbed into broad categories.
Some of these will be guesstimates.
For example various expense categories can include rent, groceries, household maintenance, travel, fuel, utilities i.e. electricity, gas, cable, cellphone, and discretionary expenses such as eating out, shopping, entertainment etc. You can even factor in annual travelling expenses, divided by 12 to take them on a proportionate monthly basis.
From your income and expenses you will arrive at your monthly savings figure each month. Wherever possible, see if you can cut down on your expenses and channelize this extra saved amount towards your contingency fund (at least 6 to 24 months expenses) or your goal based investments.
3. Know Your Bank Balances
Often we have multiple bank accounts. Know what you have in each account, and if possible, assign certain inflows and outflows to specific accounts. This will help be more organized financially. Another way of doing this is to have just one account, and you will automatically manage all your cash flows out of this account.
Often we have multiple bank accounts. Know what you have in each account, and if possible, assign certain inflows and outflows to specific accounts. This will help be more organized financially. Another way of doing this is to have just one account, and you will automatically manage all your cash flows out of this account.
Some banks offer the option of a flexi deposit.
This is basically a fixed deposit (with FD rates of interest) that also offers
you the flexibility to withdraw from it anytime you want, even using your debit
card. The benefit here is that you earn much more interest than a normal savings
account, while enjoying the same flexibility and no lock-in of your money.
4. Know Your Goals
Goals, aspirations, desires - we might have different words for the things we want to achieve, but no matter what we call them, if we don't take concrete steps to achieve them, we might as well call them dreams.
Here is an example list that can help you get a better idea of what your own goals might be:
Goals, aspirations, desires - we might have different words for the things we want to achieve, but no matter what we call them, if we don't take concrete steps to achieve them, we might as well call them dreams.
Here is an example list that can help you get a better idea of what your own goals might be:
- Buy a car worth Rs. 12 lakhs in 5 years
- Buy a property as an investment worth Rs. 50 lakhs in 8 years (funded partly
by loan)
- Take international family holiday to Spain for 1 week in December this year,
worth Rs. 4 lakhs.
- Send daughter to university at her age 21 for post graduation, worth Rs. 40
lakhs
- Fund daughter's wedding for Rs. 15 lakhs, at her age 25
- Retire early, by the age of 50, earning Rs. 1 lakh per month from my
investments.
5. Have a Plan to Achieve Your
Goals
Knowing where you stand, taking stock of your cash flows, assets and liabilities, savings and investible surplus is all well and good. But if you don't have a plan to achieve your goals, then you are going to run the risk of haphazard investments and not achieving your goals.
Each goal that you have should have a dedicated investment portfolio, comprising equity and debt investments, depending on the time horizon to your goal.
For example, if a goal is 10 years away, you can have up to 70-75% exposure to equity investments, 10% in debt and 15% in gold by way of an ETF. For a goal that is less than 3 years away, opt for a 100% debt portfolio so that you don't expose your investments to stock market volatility.
Knowing where you stand, taking stock of your cash flows, assets and liabilities, savings and investible surplus is all well and good. But if you don't have a plan to achieve your goals, then you are going to run the risk of haphazard investments and not achieving your goals.
Each goal that you have should have a dedicated investment portfolio, comprising equity and debt investments, depending on the time horizon to your goal.
For example, if a goal is 10 years away, you can have up to 70-75% exposure to equity investments, 10% in debt and 15% in gold by way of an ETF. For a goal that is less than 3 years away, opt for a 100% debt portfolio so that you don't expose your investments to stock market volatility.
Conclusion
Sometimes, the simplest ways to do things have the cleanest and best results. The benefit of conducting these 5 steps include a greater level of awareness, more financial control and a sense of purpose that will greatly increase your chances of achieving your life goals.
Sometimes, the simplest ways to do things have the cleanest and best results. The benefit of conducting these 5 steps include a greater level of awareness, more financial control and a sense of purpose that will greatly increase your chances of achieving your life goals.
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