Thursday, September 20, 2018

Beginner guide: to plan your finance in superb way - Financially Pro

Did you start earning and still wondering where to invest and for what to invest?

I also thought the same when I received my 1st income.
beginners guide to plan your finance in awesome way



Planning your finance from the beginning is very important as cost of delaying investment is too high. You must have listen from so many people like start small, start early.
It becomes difficult to differentiate what is more important for saving and investing and what not.

So, let's go ahead and understand of planning your finance as a new earner.
If you are earning since long and still don't know about it, today is best time to start. GO AHEAD.

In school you must have studied about Maslow's hierarchy of need.
Hierarchy of investment need
source: Wikipedia



Here, as per need and hierarchy we climb steps and go to the next level.

Firstly we need our basic needs, if we don't even satisfy our basic needs we can't think of self actualization stage.
This is step by step process from basic need to safety, need of love to esteem and self actualization.
You can read more about it Here

Don't worry, I am not going to talk about this in detail but it is relevant to our post.

Understanding relevance of spending money for a particular goal becomes very necessary.

I was also confused when I received my first income regarding what to do first.

So to avoid such confusion for you, I am here with this post.

You need to follow steps to understand where to spend money invest money first and where later.

Let's talk something about Hierarchy of investment need.

Sound's little difficult?
Let's make it simple
Hierarchy of investment need means prioritizing your investment. Hierarchy means level or step. To make it more simple it's about priority from first to last.

Why it was developed?

I don't know who developed it. But if I try to understand it's purpose, I can say that it's for using money by prioritizing for the purpose of protection and need TO desires and goals.
beginners guide to plan your finance in awesome way


#1 Investment Need: Emergency fund

Emergency fund is MUST for all to face contingency. Anytime you may need money for hospitalization, major car expense or paying somewhere urgently. Emergency fund can be very helpful. But it's importance is only realized when you are in situation where getting money is urgent.

You can create emergency corpus by deciding total amount required and saving in though 12 parts i.e. 12 months.

You can click here to understand it in very detail.

#2 Investment Need: Life and health insurance

Did you noticed that emergency fund is placed even before life insurance?

Life and health insurance are necessities and you must have.
According to source, Still 80% of Indian's don't have health insurance.

Having life and health insurance can help you to face tough situation like costly hospitalization, accident, death of any member.
You should have term insurance so that your family member can be secured incase something happens to you(don't worry, nothing will).
There is confusion regarding ULIPS or term plan.

ULIPS and term plan are insurance product offered by insurance companies.

If you buy ULIPS of 1 crore then yearly premium is around 2-3 lacs. It's little nigh but you get money back when term is over.

If you go for term plan of 1 crore then yearly premium is around 25000. Too low compared to ULIPS but you don't get anything back when term is over.



#3 Investment Need: Short term goal

As you have enough life cover and emergency fund, now you can think of other short term goals.

Short term goals are generally of 2 or 3 years and it includes fund for purchasing car, vacations, purchasing electronic item etc.

You must have listen like fund which are of 3 years of less should not be invested in equity.
The only reason is because of its volatility and risk to capital.

Another major reason is when your goal is near and market is bullish, your fund may be undervalued and you cannot get desired amount.
You can get return of 8to10% or even 12% but that depends on investment vehicle you have selected.

#4 Investment Need: Long term goal

Last but not least 'Long term goal'
It include retirement corpus, buying home, child's education etc.
It is generally of more than 3 years. 
This fund should be invested in equity fund so that you can get benefit of compounding.
You can go for large cap equity fund or midcap. You can get return of 12to15% annually.

But remember that from time to time you need to verify your fund and readjust your portfolio according to your requirement and market conditions. You can meet your financial advisor for that.


So, this is how you can prioritise your investment goals and achieve it.
BUT remember that emergency fund is most important.
All the steps are arranged from short term to long term.

Following this order is important, missing anyone of it may create problem.
If you still have any doubt, feel free to comment.