Financial planning is never done in isolation. It always makes sense to plan your finances in the context of your life stage and needs.
There are several factors that play out when you are preparing your financial plan. Everyone keeps in mind the purpose of investment, age, dependents and the stage of financial market while making investments. However, a carefully crafted 360-degree investment plan should go much beyond that.
It must also factor in the following –
1. Your income and expenses
2. You existing investments
3. Liquidity situation
4. Short term and long-term liabilities
5. Insurance cover
6. Risk appetite
7. Life events
8. Life goals
9. Inheritance etc.
A plan is called a 360-degree plan when you have considered all the parameters in mind which influence your well-being and hence, decisions.Let’s examine these parameters one by one and see how they impact your investment decisions.
Figure 1 – Your investment decision must weigh in many factors
Your income and expenses – one must weigh in not only the quantum of income but also income stability. For example, there was a time when having an IT job was considered very safe. However, the technology scene is changing so fast that even IT people are finding difficult to cope up with it and as a result are losing their jobs. Income stability is thus impacted. Government jobs are still considered to be safe.So are jobs of professionals like Chartered Accountants, architects, engineers, doctors etc. Finbingo wealth builder gives necessary attention and weight to your job and provides the requisite score to your income and expenses.
Your existing investments – have your existing investments is one of the most important criteria based on which your next investment decision is made. If you already have reasonably good investments made in the past you really need to worry less about your future investments. This enables you to take riskier bets.
Your liquidity situation – we have seen cases where individuals have made very good investments but they’re mostly in illiquid investments. On one hand they have very good investments and on the other they are struggling to pay their credit card bills, however small it may be. It is very important to retain a balance between liquid investment and illiquid investments and remain liquid at all times. The ability to meet your liabilities when due is priceless and shouldn’t be traded with any other investment opportunity.
Your short term and long term liabilities – it is important from liquidity perspective that you always have reasonable funds to cover your short-term liabilities and have a proper plan in place to cover your long term liabilities. For example, you need to have reasonable insurance cover that covers all your long-term liabilities. Finbingo recommends you have at least 10 times of your salary as insurance cover.
Insurance cover – lot of people set out to create wealth but fail in having reasonably good insurance cover. As a result, they end up spending a lot of money in sudden medical exigencies that happen in the family. It is thus very important to have a good family floater medical plan to keep medical contingencies away. If any disease or hospitalization strikes you it should be the insurance company that should pay for it and not you. It is also important to have life insurance cover and accident insurance cover in place. As argued earlier one must have at least 10 times his income covered in the form of life insurance. The insurance cover should also be more in case you have children who have aspirations of studying abroad since the costs are going to be higher. In any case one must always have sum of all liabilities, both actual (like home loans already taken) and contingent (kids education costs, your own medical costs etc.) in mind while taking insurance cover.There is no point in having a home loan of Rs 10,000,000 and an insurance cover of Rs. 5,000,000.
Risk appetite – it is also important to be conscious of your own risk appetite while making investment decisions. If your risk appetite is low, you should stick to bank fixed deposits or AAA rated bonds that are issued for retail investors. Returns from stocks and shares are appealing but are highly prone to volatility that may not be easy to digest by all investors.
Life events – life events are again very important while preparing a financial plan. For example, the moment you have kids you need to be less reckless with your investments. If you have a wedding coming up in family it may eat up a lot of funds and hence it is important to remain liquid from about 6 months before the wedding. Plan your life stages carefully.
Life goals – the most important criteria while preparing a financial plan is keeping your life goals in mind. If you have kids who have to be sent to college in 3 years’ time for which you need to allocate a lot of money, there is no point in taking risk on your investments that cannot guarantee return of capital. In such cases it is important to have investments that will have at least guarantee you the corpus that is needed to pay off college fees. Similarly, if you want to a house one or two years down the line, you need to have guarantee of funds. You cannot be risking your money in equities looking for quick returns on the same capital in such a case.
Inheritance – not everybody is so lucky to have inheritance coming their way. However, if you have family legacy coming your way you can take riskier bets with your investments in pursuit of better returns.
The point that this article is driving to is the fact that for every investment you need to keep in mind the life stage that you are in, the actual conditions impacting you, your goals and the fact that you need to weigh in these factors while taking your investment decisions.
You are more likely to reach your financial goals if you do and will lead a happier life.