- Personal Finance»
- Understanding Finance
4 Steps To Building A Financial Future
Why Should You Have A Financial Plan At All?
Around 76 percent of adult Indians do not understand key financial concepts such as diversification, inflation and compound interest, according to the S&P Global Financial Literacy Survey. The survey was conducted in 2014 and the results were published in 2015. The survey was based on interviews of over 150,000 individuals in over 140 countries. Knowing key financial concepts such as pension plans, mutual funds, term plans are essential for planning your future finances efficiently. Not having a plan in place can lead to cash crunch or could erode your savings in times of need such as a medical emergency. Here is what you should do.
Determine Your Financial Goals
Before you set out to save or invest your money, you must determine your financial goals. In other words, you must know why do you need to save or invest your money? You might save money to fund your child’ education or marriage expenses, retirement, healthcare expenses or you might simply invest to create wealth. Once you have determined your goals, you must determine the time horizon you have to achieve them and the amount you wish to accumulate under each head. This will in turn help you ascertain the amount you need to save so as to build the required corpus in the given investment time horizon.
Get Rid of Your Debts
Before you start saving or investing, the first thing that you must do is to get rid of your debts. This may include credit care dues and other debts such as home loan and car loan. Paying monthly credit card bills a week late may look harmless to you, however; the same dues can accumulate to account for over 20-25 percent interest annually. Therefore, you must clear your dues first. If you have more than one credit card then you must assess whether you are using all of them? If not, then you can shut down the ones not in use. If you have surplus cash in hand then you can contribute more to your EMI for prepayment of loan or foreclose the loan all at once. Prepayment of loan will decrease the loan repayment tenure which in turn will save you on interest payment. In other words, you pay less interest to the bank than originally calculated, says an article published in Rediff in October 2015
Start Saving Today
One of the most important rules of saving or investing for any financial plan is to start as early as possible. This is so because compounding is at play. When you start early you will be able to build the same corpus with lower contributions and in a much lesser time, as illustrated in an article published in India Today Money in August 2015. This is true whether you are saving for a retirement plan or investing in mutual funds to create wealth.
Get Proper Life Insurance
You might save lakhs of money but it would be no replacement for a life insurance policy. Life insurance should be one of the first products in your investment bucket. This is so because it will help you secure your family’s financial future after your death. You can consider a term plan for comprehensive cover. Term plan is the only pure life insurance product offered in India, others being part investment products. It offers a high cover at a low cost. For deciding the cover, you must take into account your family’s future expenses, expected outlay for your child’s education and marriage and liabilities such as car loan or home loan, says an article published by Birla Sun Life Insurance.