Money Square- The complete guide to Financial planning. PART-1

Money Square- The complete guide to Financial planning:- 

   

F

inancial planning is a method of achieving our own financial freedom by managing our different sources of finance wisely.

     Many people facing some common problems related to money, like some earn a large salary but at the end of the month, they face so many liquidity problems. Many people earn a one-time income instead of monthly income so they are unable to manage expenses like EMI, Credit card bill, etc. Actually, these problems are a result of inefficient financial planning.

   

      So what factors should be considered in financial planning. Is it should be about saving for retirement, or for buying home? Is it should be about tax saving? All these answers are hidden in the following money circle, this is an ultimate guide to financial planning which can solve one's all financial problems, despite what you do, how many you earn. Although Money Square is a tool to achieve financial freedom it is not a magic trick by which you can solve your all problems within a second. It is a long term process which you need to follow delicately.

MONEY SQUARE

By reading the above diagram you can get a rough idea about financial planning it contains:-

1) Emergency fund.

  2) Insurance.
 
3) Saving & Investment.
                                                                                                                    
4) Tax Planning.

 5) Expenses.

                        All the above factors are arranged in decreasing the urgency of them. Let's look above factors one by one.     

 1) Emergency fund:- 
        The Emergency fund is a fund that contains lump sum money which is kept such that it should be liquidated within one day. Size of this fund should be equal to the salary of one's of 3 months or expense of one's of 6 months. it is a fund which will helpful to you at various urgency times. it should be medical urgency or it should be a career urgency like when you switch job then this fund will help you in the ideal period or like in slag like condition  where you can survive in this troublesome situation  with the help of these funds.

               
            We should put this amount such that it can generate a maximum possible return in the minimum possible lock-in period. One condition of this fund is that this money should be liquidated easily preferably in 24 hours. We have different options for this purpose.

            We can start saving by a small amount at the starting of our career. We have different options for it. We can keep these funds in the liquid fund so you can generate a little bit higher than saving the account rate. We can also invest these amounts in short term debt funds for which after a short period we can withdraw it easily. Another way has kept this money in four equal FD so we can get this money at a particular interval at a higher rate. We can also keep 1 or 2 Credit cards for emergency purposes, but we must not fall to the Credit trap.

2)Insurance:-

              After the emergency fund, the next thing we have to do is insurance. Insurance is a product by which we can mitigate the risk of our life, health or any kind of damage,  so one can live tension free life.

                Before understanding insurance lets understand the importance of emergency funds and insurance in one’s life. Many people are doubtful about the importance of emergency funds and insurance in financial planning because we can generate more return on money which is stored as an emergency fund.  In case of insurance we are paying money in the form of premium and get nothing in case loss doesn’t occur. Although the above factors are right so let's look at the following Risk triangle to understand these points.

RISK TRIANGLE

                As we know the relationship between risk and reward (profit) is directly proportional to risk.  For high-risk products, reward must be high. In above triangle, we have three sections arranged according to risk-reward principal.

               
               Very first section contains low risk or no risk instrument. This section is like the foundation of our financial  planning which needs to be strange. It contains very safe products like fixed deposit, recurring deposit, provident fund, public provident fund, post office saving seems, government bond, emergency fund, etc.  which provide safety of principal  and Interest with low risk.

               
              Second section contains a moderate risk instrument that will stabilize your portfolio. which higher return than the first one. This section contains mutual fund schemes, real estate, etc.

                Third and the last section contains high-risk instruments which give further stability to  one’s  portfolio.these section contain high-risk instrument like the company shares, new products like cryptocurrency, which will give one higher returns.

                
                One will invest in moderate and high-risk products to create future wealth. But we should not ignore our present   . if something happens to us in present it will not only disrupt future planning but also disrupt present planning. Hence we should secure both present and future. This is concept is the same as when there is plenty of rain we will store water into dams and lakes before utilizing it so stored water will be useful in drought conditions. In the same way, the Emergency Fund will be secure one's short term uncertainty and insurance will secure one’s long term uncertainty.

                It will be recommended that around 10% of one’s  income should go in different types of insurance to protect one’s risk from life, heath or any kind of damage.
Check the link for PART2:https://finworld2.blogspot.com/2019/10/money-square-complete-guide-to.html?m=1