Money Square- The complete guide to Financial planning:-
In the recent post, we came through information about the emergency fund and insurance in this part we will look at the remaining factors of financial planning. Check the link for PART 1:https://finworld2.blogspot.com/2019/10/money-square-total-guide-to-financial.html
3)Saving and Investment:-
As we have seen the way to secure our present now it is time to look at ways to secure our future by wealth creation. The path of Investment went through saving. Saving is a very useful habit to achieve the goal of wealth creation.
Most people think that their income is not enough to save or they think that they will save after an increase in their income. But we don't realize that our expenses will increase with our income because of increase in our standard of leaving. Hence regular saving habit is mandatory for wealth creation irrespective of how many you earn. Normally it is recommended that we should save 30% of our income. This figure may vary on different factors as age, liabilities (loans), income, etc.
We have to invest the amount we saved in a wise manner as discussed in the risk triangle so we can get a balanced combination of low, medium and risky time of investment options so our portfolio gets stability.
Investment is a long term process. we should invest in Instrument for a minimum of 7 -10 years to getting the benefit of compounding. We have various kinds of investment instruments and need to choose different instrument by understanding their pros and cons according to our requirements. these factors are like return, capital risk, default risk, duration of investment, liquidity, taxation, etc.
In many investment Products, we can invest either by our-self or we can outsource it to other experts. As we all are experts in our own field. doctors are experts to conduct surgery, engineers are experts in their field, so investment needs deep study and regular follow up. If we have enough time then we are able to analysis all this stuff,otherwise, we can give this task to an expert in this field. Who will take some fees for these tasks. Even after outsourcing these tasks to expert our work is not done, we need to continuously follow up with them. In the upcoming series of this blog, we will see various tools to analyze investment and mutual funds.
4)Tax Planning:-
Tax Planning is an important part of Financial Planning. we can increase our effective income by tax Planning. We can also reduce our taxable income by investing in above products. In India, and different countries in the world we can get tax benefits on these products.
In India, under Section 80C we can deduct our taxable income up to 150000 Rs by investing various tax saving schemes like ELSS(Equity linked tax saving scheme) and insurance. Under section 80 D we can deduct our taxable income up to 25000 Rs through Health Insurance.
Although These Instruments helps us to save tax, we should invest in these products for their respective purpose and not a tax-saving purpose.
5) Expenses:-
Although Expenses seem to be the last part of financial planning it is not last. it is a circle, means when we manage our expenses then only we can save to invest in different products. As we told before our expenses keep increasing with our standard of leaving, And nothing is wrong that we are working so hard for improvement in our standard of leaving.
We have to manage these both things i.e our expense and standard of leaving by prudent budgeting. In budget you may consider various factors like rent or home loan EMI, child education, food expense etc, So you will get a rough idea of your expense. It is not mandatory to follow this budget Accurately, if We follow these budgets roughly then also we can achieve our dream of financial freedom.
In the recent post, we came through information about the emergency fund and insurance in this part we will look at the remaining factors of financial planning. Check the link for PART 1:https://finworld2.blogspot.com/2019/10/money-square-total-guide-to-financial.html
3)Saving and Investment:-
As we have seen the way to secure our present now it is time to look at ways to secure our future by wealth creation. The path of Investment went through saving. Saving is a very useful habit to achieve the goal of wealth creation.
Most people think that their income is not enough to save or they think that they will save after an increase in their income. But we don't realize that our expenses will increase with our income because of increase in our standard of leaving. Hence regular saving habit is mandatory for wealth creation irrespective of how many you earn. Normally it is recommended that we should save 30% of our income. This figure may vary on different factors as age, liabilities (loans), income, etc.
We have to invest the amount we saved in a wise manner as discussed in the risk triangle so we can get a balanced combination of low, medium and risky time of investment options so our portfolio gets stability.
Investment is a long term process. we should invest in Instrument for a minimum of 7 -10 years to getting the benefit of compounding. We have various kinds of investment instruments and need to choose different instrument by understanding their pros and cons according to our requirements. these factors are like return, capital risk, default risk, duration of investment, liquidity, taxation, etc.
In many investment Products, we can invest either by our-self or we can outsource it to other experts. As we all are experts in our own field. doctors are experts to conduct surgery, engineers are experts in their field, so investment needs deep study and regular follow up. If we have enough time then we are able to analysis all this stuff,otherwise, we can give this task to an expert in this field. Who will take some fees for these tasks. Even after outsourcing these tasks to expert our work is not done, we need to continuously follow up with them. In the upcoming series of this blog, we will see various tools to analyze investment and mutual funds.
4)Tax Planning:-
Tax Planning is an important part of Financial Planning. we can increase our effective income by tax Planning. We can also reduce our taxable income by investing in above products. In India, and different countries in the world we can get tax benefits on these products.
In India, under Section 80C we can deduct our taxable income up to 150000 Rs by investing various tax saving schemes like ELSS(Equity linked tax saving scheme) and insurance. Under section 80 D we can deduct our taxable income up to 25000 Rs through Health Insurance.
Although These Instruments helps us to save tax, we should invest in these products for their respective purpose and not a tax-saving purpose.
5) Expenses:-
Although Expenses seem to be the last part of financial planning it is not last. it is a circle, means when we manage our expenses then only we can save to invest in different products. As we told before our expenses keep increasing with our standard of leaving, And nothing is wrong that we are working so hard for improvement in our standard of leaving.
We have to manage these both things i.e our expense and standard of leaving by prudent budgeting. In budget you may consider various factors like rent or home loan EMI, child education, food expense etc, So you will get a rough idea of your expense. It is not mandatory to follow this budget Accurately, if We follow these budgets roughly then also we can achieve our dream of financial freedom.
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