We all want financial freedom but need to learn how to manage money, its planning, and its methods. Many of us are unaware of the formula for managing money and becoming rich. Financial Planning is one of the most crucial aspects of everyone’s life. It allows everyone to achieve their goals and secure their future.
Many people avoid it because they think that this is complex and lots of planning is involved in it. So they just save their money in the bank and FDs. If you are one of those, then you are losing a big opportunity to create wealth in your life.
According to me, Financial planning should be as simple as possible. If complexity gets involved in any work, it will affect the result. Here I will discuss how we should manage our money and accumulate wealth in our life. I will explain it in very simple methods.
I have categorized financial planning into Six Steps:
- Savings
- Loans
- Insurance
- Investment Plan
- Retirement Plan
So let’s explore each of the steps in depth.
1.) Savings
One of the most important rules of saving is that your expenses should not be more than your income. It means if you are earning Rs. 50,000 per month then your expenses should not be more than Rs. 50,000. As per my thinking, your expenses should be half of your income if you are planning for a long-term wealth creation plan. But if it is not possible then the first rule should be must followed.
Income > Expenses
You must have enough savings in your account so that you can run your household in an emergency. We have already seen a similar situation during COVID-19 when we needed emergency funds and many people were jobless. So “Your savings are the best friend in emergency period“.
2.) Loans
The second most important financial planning aspect is loans or debts. According to me, loans can be of two types: Good Loans and Bad Loans. Let’s discuss each of the parts.
Good loans are the loans that are necessary for us and have the potential to grow in value or generate wealth over time. For example, Student loans for education, housing loans for real estate investments, or business loans.
Good loans have generally lower interest rates and make the payment affordable while building assets. These loans have the potential to create a positive impact on one’s financial planning. So we should include it in our financial planning.
Bad loans are loans that are used to finance non-essential or depreciating assets. These types of loans are generally used to cover lifestyle expenses. For example, high-interest credit cards or Vehicle loans. Bad loans generally come with higher Interest rates. These loans usually create strain on one’s financial planning. So we should avoid it.
3.) Insurance
Insurance is one of the crucial parts of mitigating risk and furnishing financial planning. I have divided Insurance into two parts: Life Insurance and Medical or Health Insurance.
Life Insurance provides financial protection in case of any casualty like death. In financial planning, life insurance plays a crucial role in providing income replacement for dependents, paying off outstanding debts, funding education expenses for children, and serving as a source of inheritance or wealth transfer. If you are earning Rs. 6,00,000 per year then you must include health insurance 20x of your Annual Income i.e., 6,00,000 X 20 = 1,20,00,000 or 1.2 Cr
Health Insurances are used to cover medical expenses and provide financial protection against medical emergencies like illness, injuries, and treatments. Health insurance is mandatory for everyone in the family and it should be of at least Rs. 2 lacs. I have seen that in any medical emergency, lakhs of bills are prepared. So health insurance will protect you and your family from extra expensive medical expenses and can play a key role in financial planning.
4.) Investment Plan
Investment is my favorite financial plan because this is the biggest wealth creator plan. I have divided Investment into several parts: Equity or Mutual Funds, Gold, and Real Estate.
Equity is my all-time favorite investment idea but it depends on one’s risk appetite. You can Invest in Stocks if you are good at stock picking. Risk is included in the stock market so most people avoid investing in Stocks. So if you don’t want to invest in Stocks, then mutual funds are the best option for you.
In India, Gold and Real Estate are the two most popular options. Gold is a precious metal. You can invest in gold by either buying it physically or by investing in Gold funds or ETFs. Real Estate is another popular Investment option for the long term. Real estate investments can provide a steady stream of rental income, which can contribute to passive income and long-term financial security.
Now a question will arise in your mind how much money should we invest?
Investment Amount = ⅕ x (Income)
There is one golden rule of investment is to invest 20% of your income. If your income is Rs. 1,00,000 per month then you should invest 20% of it i.e., Rs. 20,000 per month.
5.) Tax Planning
Taxes are one of the most important aspects if you are planning your finances. If you are not going to plan your taxes then it will cut your savings. The primary concept of Tax Planning is to save money and reduce tax burden. Section 80C is the most popular tax-saving scheme. Equity-linked saving scheme(ELSS) is the most popular scheme that provides dual benefits of capital accumulation and tax-saving.
Apart from ELSS, you can choose to invest in government schemes such as the National Savings Certificate(NSC), Public Provident funds(PPF), and Tax-saving FDs, etc. If your income is more than Rs. 6,00,000, Use 80C wisely where you can save Rs. 1,50,000 on mutual funds, buy life insurance, and show your income less.
5 D’s are very famous in tax planning. You should know the 5Ds, or the 5 pillars of income tax planning that are deducting, deferring, disguising, dividing, and dodging to save tax.
6.) Retirement Plan
Retirement is a very important plan for allocating proper resources to ensure financial strength after a certain amount of time. Retirement plan depends on how much money you want during your retirement.
NPS or National Pension Scheme is the best scheme to get a certain amount after a particular amount of time. If you are 30 years old and want retirement at 60. Then you can invest Rs. 10,000 per month in NPS then after 30 years during your retirement your retirement corpus would be Rs. 1,77,97,725 which is around 1.77 Crore. If you choose a plan of lumpsum withdrawal of 50% then you will get a pension of around Rs. 51,000 monthly.
You can use the NPS calculator to calculate your investment VS return ratio. Investment in NPS depends on your desire to get a monthly pension post-retirement.
