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Financial Planning has different connotations and
meaning for many. There are quite a few myths about financial planning. It
is a myth that financial planning is for only rich and one requires
substantial amount to initiate a financial plan. Many feel that they are
too young and hence it is too early to start a financial plan.
It is a classical example
of description not being the thing described. What is financial planning?
Financial planning includes:
a. Identifying
all the financial needs of an individual. Be it is marriage or child’s
education or to take care of retirement needs.
b. Translating
these needs into monetary measurable goals at different times in future.
Building a home can be a goal but that has to be expressed in monetary
terms. Moreover, for all future goals inflation also has to be taken into
account.
c. Planning
financial investments that will allow to provide for and satisfy future
financial needs thereby achieving life’s goals.
Financial planning has assumed great significance
of late. The reasons for and the need of financial planning are:
1. Transition
from defined benefit to defined contribution in case of super annuation
benefits.
2. Phasing
out of guaranteed return products.
3. Chances
of variation in cash flows due to loss of job, change in job profile etc.
4. The
increase in longevity and hence the increase in medical expenses post
retirement.
Advantages of Starting Early:
Let us restrict out
discussion to creating a nest egg and advantages of starting early to
create the same. If you want to create a sufficiently big nest egg and
retire rich, start saving and investing early. The most powerful tool when
it comes to retiring rich, is compounding your returns on money saved when
you are young. Through the power of compound interest, cash invested today
has a massive impact on your wealth level when you retire.
The question often asked
is “ what if I have not started early”. If you have not started early, you
have to save more in later years to accumulate the required nest egg or you
have to opt for higher return securities which means that you have to take
higher risk.
Having decided to invest
early, the next question is how much to invest? Let us limit the discussion
to retirement planning. When winter comes can spring be far behind?
Unfortunately, the converse is also true. When we are in the spring of
youth, we have to think about the winter of our life and save for it. The
steps for creating a nest egg especially retirement planning can be broadly
classified as:
1. Decide
on the annual income you desire after retirement to lead the style of life
you wish.
2. Choose
a target date. Retirement date in case of retirement planning.
3. Determine
your lifetime average inflation rate.
4. Determine
the average rate of return you expect on your investments before and after
retirement.
5. Determine
the current market value of all your investments.
6. Obtain
an estimate of any company provided pension benefit.
Aimed with the data, you
can determine the annual savings required for you to enjoy the good life.
You will also be able to play “what if” games and see the results quickly
should you decide to vary things like inflation, rates of return, date of
retirement, and desired income. You will be able to review your retirement
plan if required when any of the data or assumptions change. Invest early,
invest wisely and invest systematically to enable you to achieve your
financial goals.
Disclaimer:
The information provided here is only for informative purposes and nothing
more. It is not in any way to be construed as authoritative. Always consult
your financial advisor before taking any decision. It is informed to the
people that this information that is provided here is not to be acted upon.
In spite of our advise, if any person acts upon the contents of this web
site and incurs a loss, they do it on their own risk. We are not to be held
responsible for any loss, incorrect information etc.
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Other pages on Financial planning:
Asset Allocation Retirement
Planning
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