The first thing which every financial planner will tell you is to clearly specify your Financial Goals. Because till the time you don’t have financial goals – you will never know how much money you need and when you need it.
Living a life without Financial Goals is like driving a car on a highway without knowing your destination and without knowing how many times you would be required to do fuelling in your car. This is very dangerous as you would not like to see your car getting stopped in the middle of the highway if the car runs out of fuel.
The same is the case with our lives. If we don’t have clearly defined financial goals – you will never know how much money you need and when you need it.
Most people have dreams of owning a big car or a big house or travelling the world but very few put a timeline on these dreams and work towards achieving it.
If you wish to have a financially secure future and also fulfill all your dreams – the 1st thing you should do is to clearly write down your dreams and put a timeline on these dreams. Simply write – What you want and when you want it.
And once you have written this, classify them into different buckets and then think of how you intend to achieve these goals.
Planning your Investments
Once you have clearly specified how much money you need and when you need – the next step is to practically start working towards achieving these goals. You surely would be required to save some money to achieve these goals but simply saving money would not be enough.
You would also be required to invest this money so that you make more money out of this money which you had saved earlier.
The following are some of the investment types which are most suited depending on the nature of the financial goal and the target date.
- Contingency Fund
The 1st thing which every person should have is a contingency fund. You never know if tomorrow your regular flow of income stops (like Salary, Rent etc) or there is an unforeseen event (like illness/accident etc) for which you require money.
To meet such unforeseen expenses, every person should have a contingency fund which should ideally be 5-6 times their monthly income. And this money should ideally be kept in highly liquid investments from where money can be withdrawn instantly.
The best place to park money for contingency fund is fixed deposit as the money from a fixed deposit can be withdrawn instantly.
A person should also try to increase the size of your emergency fund in accordance with the rise in monthly income.
- Adequate Term Insurance Cover
Everybody knows the importance of insurance but very few know how much insurance do they need. With increase in life expectancy and rising inflation, determining how much insurance is also very important.
Most financial advisers recommend that the life insurance cover should be atleast 10-20 times the monthly earnings and this should keep increasing as the income increases.
Even the govt is encouraging people to have adequate life insurance cover and therefore allows for deduction under Section 80C for the Life Insurance Premium paid.
Find out the how much life insurance do your need here
- Adequate Health Insurance Cover
The medical costs in India have been rising very steeply and these costs aren’t the same as they used to be a couple of years back. Hospitals have started looking like 5-star hotels and charge accordingly.
Apart from Life Insurance Cover, a person should also have health insurance cover for the whole family. And if this cover is taken at an early age, the premium to be paid is also low as compared to if this premium is taken at a later age.
The insurance premium paid can also be claimed as a deduction under Section 80D. This deduction for payment of health insurance premium is in addition to the deduction allowed under Section 80C.
- Investment for Short Term Goals
Apart from the above 3 goals which everyone should have in their financial plan, there are some other goals as well like buying a car or going on an International Vacation etc. These are the goals for which the person would be requiring the money in the next 1-3 years.
To achieve these short term goals, a person should ideally invest in instruments which have low to moderate risk like Debt Funds, Arbitrage Funds etc. Investment in Fixed Deposits may also be considered.
- Investment for Medium to Long Term Goals
These are the goals which have a timeline of more than 3 years. Some examples of such goals include buying a home or child’s marriage or child’s education etc.
Investments in PPF or Fixed Deposits may not help you achieve these financial goals as the interest offered on these instruments is fairly low as compared to other instruments.
Fixed Deposits or PPF are safe funds and are good for achieving short term goals but for achieving long term goals it is better to invest in Mutual Funds through the SIP Route. Although, Mutual Funds are slightly risky in nature – but in the long term they provide positive returns and the returns in most cases are more than the returns offered by Fixed Deposits or PPF.