Planning our investments and savings is one of the most daunting tasks but also the most essential. I can dream of a carefree life but that is not possible if I do not have the money to back it up. Today’s market is a consumer’s delight as well as a predicament because there are too many options to choose from. ‘What happens if the market is down?’ ‘Don’t I stand to lose my hard-earned money?’ All this is very confusing to a layman like me. ‘How and where should I invest so that I can get the maximum returns as well as keep my capital safe?’ This, I believe is a dilemma for all of us. To make a difficult decision easy, we need to understand some basic rules of financial planning.

What is financial planning?

Financial planning is a systematic way of planning your investments and savings to make them tailor-made to suit your specific needs and requirements. A proper financial plan acts as a guide and a crutch helping you through every crisis. However bad the situation might be, a good plan will bring you back on track and work as a backend support system.

Who needs financial planning?

• If you are a salaried person working in a private or government job.
• If you are a professional i.e., a doctor, a chartered accountant, or someone with an independent firm.
• If you are a businessman.

You do not need to consult any expert for this. There are just some basic rules that you have to keep in mind and- hey, you’re good to go!

The 7 Basic Rules of Financial Planning:

1. Identify your need:

Before you start purchasing any savings instrument, you need to identify your short-term and long-term goals.

Short Term Goals

• Maybe if you are planning to purchase a house in the next 5 years
• Keeping aside funds for your marriage
• Planning a foreign trip

• Saving funds for your child’s college education
• Savings kept aside for children’s marriage
• Retirement funds

2. The 30-40-30 Rule:

This is the rule which tells you how to divide your hard-earned salary so that you are not left scrimping and cutting corners. If you put all your funds into savings and investments, you will find it very hard to save for a long period. On the other hand, if most of your money is spent on shopping and fun, you will be left with no savings.

So, the rule to follow is:

• 30% of the monthly salary is to go towards savings and investments
• 40% is for home expenses, and
• 30% is for outings and pleasure

3. Don’t Mix Insurance and Investment:

Insurance is not an investment or saving instrument and should not be treated as such. Any insurance, whichever the company and however good the plan, does not give more than 6 to 8% returns. The basic purpose of insurance is to protect your family.

4. Always Maintain an Emergency Fund:

Do you remember how our mothers and grandmothers used to hide away money saved from house expenses in such a way that nobody knew about its existence? Then, when there was a crisis you would find some hundreds popping out of the rice can, a few 50s under the clothes, and so on. That is the best method of saving.

How to Create Emergency Funds?

• Maintain a separate account for an emergency fund
• Put a fixed amount into it every month and do not touch it unless it is a dire emergency. Ideally, your emergency fund should have a balance equal to 3 months’ take-home salary

5. The Financial Pyramid:

Now that we have dealt with most of the basics, let us get down to the actual landing and how it should be done and that is the financial pyramid. I know, it does sound complex and daunting, but it is very easy and a very good way to plan your investments.

The base of your pyramid is protection for your family and loose funds for emergency purposes. This needs to be looked into before you plan any other investments.

Elements of Protection

• A pure-term insurance to provide financial protection in case of unforeseen eventualities.
• A medical insurance for family to help during medical problems.
• An emergency fund in cash

Once the foundation is built then start identifying your long-term and short-term goals.

Savings for Short-Term and Long-Term Goals

For this, you will need to calculate both the amount that you need, and the number of years that you have, to achieve that target.

Some Long-Term Goals

• Funds to be collected for the child’s college education
• Children’s marriage
• Maybe planning to set up a business for your son

Short-Term Goals

• Planning to purchase a house in the next five years
• Buy a new car
• Plan a vacation or a foreign trip

For your long-term goals, you might look into investing in a combination of insurance and mutual funds. For short-term contingencies, you might look into other forms of investment, maybe some mutual funds. But here again, the form of investment has to have the minimum risk factor.

Wealth Creation

The final part of the pyramid is wealth accumulation. This is to be dealt with only after all the essentials have been taken care of. All of us like to dream big. A big bungalow, or a fancy car; maybe a few foreign trips…all of us have these desires. You can plan your savings in such a way that it can help you fulfill at least some of your wishes. For this, you can look into some high-return mutual funds or some good debt instruments. Investing in property is also a good option.

6. Don’t Put all your Eggs in One Basket:

Your investments should never be lopsided. If you invest too much in insurance, it will definitely give you security for your capital but the returns are not going to be very great. On the other hand, putting all your hard-earned savings into mutual funds will make you vulnerable to high risk. Make sure that your investments are well divided according to your specific needs. A healthy portfolio has investments across varied instruments like equity, debt, insurance, and cash.

7. Conduct Regular Reviews of your Portfolio:

Once we have our savings and investments in place, we cannot just put them in the safe and forget about them. Our savings and portfolio have to be reviewed every five years. The main reason for this is that you will see a lot of changes in this time period. Our family dynamics change, sometimes we welcome a new member into our family and sometimes we find that some of our short-term needs have changed. All these changes need to be incorporated into our regular savings. A review of our portfolio also gives us the opportunity to remove those investments which are not giving good returns and purchase some new ones with better features and returns.

The Tax Aspect:

Almost all investments get a tax exemption under Section 80c and health insurance is exempted under section 80D.

Some Do’s and Don’t

• Before investing in any plan, take advice from an expert.
• Always read the manual and instructions very carefully, especially the fine print and the terms and conditions.
• Plan for a long term and only invest the amount which you think is right for you.
• Don’t follow the herd mentality and invest according to popular belief.

This, I have found from experience is the simplest way to make sure that we are not stuck in a bad situation. A proper financial plan is like a guiding light that will always show you the way.

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