WAYS OF MODERN FINANCIAL PLANNING

“Direction is much more important than speed, many are going nowhere fast”

Every person has a dream which generally drives his actions and motivates him to work hard. It sets an objective in life—a reason to live and fulfil his dreams. Not all but most of the dreams are fulfilled by healthy finance. E.g. every typical person wants to have his own house, a car, and a luxurious life. Similarly, one can observe that everything today is driven by finance.

As said, finance serves as the lifeline of any business, individual etc. and this is one thing which is always in constraint. It is a limited resource and hence, wastage of this resource should be avoided. Rather, it should be used in an optimum manner and should be applied towards the pre-committed objectives.

As said, finance serves as the lifeline of any business, individual etc. and this is one thing which is always in constraint. It is a limited resource and hence, wastage of this resource should be avoided. Rather, it should be used in an optimum manner and should be applied towards the pre-committed objectives.

Let us understand the five modern ways of financial planning.

  1. Establish a plan:

Planning is the most important part of anything. Planning sets the way towards your assigned objectives. The plan should not be theoretical or an essay of 1,000 words, but simple, realistic, and based upon your objectives.

A financial plan should have the following characteristics:

a) Where you are—your current net worth: If you want to go somewhere you must know where you are standing. Calculate your net worth which shall include all your assets (building, car, bike, gold, etc) minus the liabilities (bank loans, car loans, etc). Also, list down your sources of income like bank interest, salary, rental income, business income, etc.

This will help you understand how much you are earning exactly and how much you are really worth.

b) Prepare your income statement: Income statement means how much you are earning and how much do you spend. Include all your regular cash outflows, like car instalment, tuition fees, etc. Categorise the expenses in the following format:

– Mandatory: This shall include all the mandatory cash flows like children’s tuition fees, your bank loan instalments, medical premium, etc.

– Saving: This shall include in case you are availing certain savings like recurring deposits etc.

– Optional: This shall include which are not mandatory right now and can be deferred.

– Luxury: This shall include all the expenses which are a luxury in nature like buying gold, car, etc.

  1. Revenue and capital approach

This is one of the greatest approaches of all time to reduce unwanted expenditure and simultaneously build wealth. Under this approach, you should divide your expenditure into two categories:

  • Revenue expenditure: Under this category, all your running expenditures are counted. Any expenditure whose utility is consumed within a year is called revenue expenditure. E.g. buying a mobile phone, electricity bill, telephone bill, house rent, interest payment, etc.
  • Capital expenditure: Under this category, all the long-term expenditures are counted. Any expenditure whose impact is for more than one financial year is known as capital expenditure. In other words, when an asset comes into existence, it is known as capital expenditure. E.g. home construction, buying a car, etc.

Now as per the approach, one should increase the capital expenditure and incur only that revenue expenditure which is essential in sustaining the life balance. One should avoid unnecessarily luxurious expenses and incur more capital expenditure which is also towards the objective you have set for.

Let us understand this by way of an example. Buying an iPhone 7 is a luxury and will not reap you any additional cash flow. Instead, if you buy a cheaper smartphone and invest the remaining money in mutual funds, the same will reap you high yields and capital appreciation at the same time.

This is all about the personal judgement. If one only incurs mandatory expenses as listed above and invests the rest of the amount in building wealth (e.g. buying a house, or building a factory, etc.) then after five years he will hold a stronger position than the one who has spent money on non-value-added things.

  1. Improved and logical tax planning

Whether you are a businessman, salaried employee, or whatever, you cannot ignore tax. Taxation plays a very important role in financial planning. A substantial portion of your income goes into taxation. Hence, one must plan taxes within legal parameters so that he ends up paying the minimum tax after availing every available tax benefit.

  1. Create a healthy portfolio of your savings

This is something perhaps people are scared of. Most of the people are not risk-takers and hence they fear to put their money in anything other than fixed deposits, which offer a poor return of seven to eight percent per annum.

However, one should set up his priorities and develop some limited risk-taking capabilities. That said, do not put all eggs in a single basket. On similar lines, one should maintain a portfolio of investment to curb risk and maintain high yields.

  1. Protect your future—retirement benefits

This is something you should not ignore while doing financial planning.

However, if you are doing financial planning properly you will be able to build a wealth that will automatically sustain your future after retirement. However, in case you are not following the plan properly, then it is recommended to provide for your future after retirement.

This scheme is not very famous and banks also do not advertise the same. However, this knowledge might save someone from financial problems.

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