Budgeting and Financial Planning

Financial Planning is something that we hear often, but often fail to go the depth of it and truly implement it. While there are many elements to it, I have noted down 4 major elements.

1. Cash Flow Planning – Every individual has a different lifestyle and financial situation. Hence, creating a personal budget is critical. It includes starting from Gross Income (Salary, Business, Rent, etc.) and then reducing it by taxes and statutory contributions to get Net Income. This is then followed by outflow of money – Investments, Insurance, Living expenses, fixed commitments, and luxury expenses. Generally, an investment ratio of 45% compared to your net income is a good ratio.

2. Specifying and Prioritizing Goals – A realistic idea of “when, why and how much” of your goals will go a long way in financial peace in your life. A goal 3 year away and a goal 20 year away demand very different asset allocation strategy.

3. Drop Dead Scenario – Most of the times family isn’t aware of the financial assets and liabilities of the earning family members. Due to this, unclaimed assets in India are more than 90,000 crores. When an asset register is prepared, it helps to track various financial accounts closely and is a good starting point for the beneficiaries in the event of an untimely demise of a family member.

Potential Emergencies – Emergencies can never be predicted, but you can always reduce the risk associated with occurrence of an emergency. Example – An adequate health insurance policy with the right clauses will help mitigate the financial risk associated with a sudden hospitalization expense.