Importance of Financial Planning

Posted by Mehul Kothari | Published on 01 Jan 2019
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Importance of Financial Planning

Why financial planning is important

Is earning money enough?

No, it is not. Though the money you earn is important, if you don’t channel it into savings and use it to fulfil your financial goals, it doesn’t fulfil its purpose. Having sufficient corpus to meet your financial liabilities and having financial freedom is what is important. Financial freedom can be achieved if you plan your finances. Here is where financial planning comes into the picture. It is an imperative tool with which you can plan your finances, create the required investments and generate funds for meeting your financial goals. Though experts stress the importance of financial planning, many of you ignore it. Why? Don’t you realize the importance?

If you don’t, here are some points which would help you see why financial planning is important -

Why financial planning is important?

Financial planning is important because of the various benefits it provides. If you have a well chalked-out financial plan you can not only handle your money efficiently, but also save for financial independence. Here are the benefits of financial planning and knowing them you would understand what makes it important –

• You will have a contingency plan

The first step of a financial plan is to have contingency funds. This fund helps you in meeting the financial strain faced in an unplanned contingency. Thus, when you develop a financial plan, you have provisions for meeting contingencies and your financial stability is not threatened.

• It helps in budgeting

A problem which many of you face very often is splurging through your monthly income. Either because of overspending or spending on unaffordable items, you blow a hole in your pockets which threatens your financial stability. This overspending and splurging can be avoided with a well-defined financial plan. Financial planning helps you create a planned budget. This budget gives you a guideline of your income and expenses and helps you save your income.

• It gives a direction to your financial goals

Having a financial plan means having a defined picture of your financial goals. Whether you want to save for your children’s future or for buying a house or for your retirement, financial planning gives you a sense of direction. You understand your financial goals and can save towards their fulfilment.

• You become financially independent

When you have planned your finances, you can meet any challenge life throws at you and deal with its financial implications. You wouldn’t have to depend on anyone to help you. Moreover, since all your goals would be planned in advance, you would have the security of knowing that there would be funds to fulfil your goals at the specified time. This brings in financial independence, something coveted by everyone.

• You can earn tax benefits

When it comes to saving, there are many investment avenues which are tax-saving in nature. However, their tenure and returns vary. When you have a proper financial portfolio you know your goals and their tenure. Based on your financial goals you can pick those investment avenues which help you save tax and maximize your returns.

Conclusion

All in all, financial planning is important. If you want to live a stress-free life in terms of financial security, a well-defined financial plan is required. If you want to meet all your life’s goals head on, a financial plan is required. Moreover, the above benefits are also promised when you have a proper financial plan in place. So, if you have financial responsibilities and you want to achieve financial freedom, resort to financial planning.

Disclaimer
Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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Why you need to start financial planning early

Posted by Mehul Kothari | Published on 01 Jan 2019

Why it needs to start early?Introduction ‘A stitch in time saves nine’ goes a famous saying which stresses on the importance of time. The same holds true for financial planning. Do you know why?Given its importance, a financial plan is essential for every individual. It helps you in meeting your financial goals in a systematic manner and gives you financial independence. Besides being important, it is advised that financial planning should be started as early as possible. Having a financial plan early in your life is beneficial because of the umpteen benefits you can get from it. If you are wondering what the benefits are, here are some for your knowledge – • It inculcates a sense of discipline in you When you start earning, you find various avenues to spend your limited income on. This leads to overspending which eats away your income. You are, thereafter, left with no money to create savings which is bad. When you have a clear cut financial plan early in life you become aware of your future liabilities and goals. You also know the funds required to meet those goals. Having financial goals instils a sense of financial discipline in you. You start saving early to reach the desired corpus and develop a saving habit which lasts your lifetime.• You can save affordable amounts regularlyWhen you plan your finances early, you start saving early. When you start saving early you have time on your hands. This time lets you create a substantial corpus by saving little affordable amounts every month. Your investments earn compound interest which, over time, multiplies your savings manifold. If you don’t believe me, see for yourself how the power of compounding works wonders –The following details are assumed for calculation purposes – Just by delaying your investments for 10 years, your corpus becomes one-third! Surprising, isn’t it? If you want the same corpus when you start late, your monthly saving should be more than Rs.14, 000 which is more than double of what you are required to save when you start early. Thus, by having a financial plan early in life you don’t have to stress your earnings and you can create sufficient funds for future.• You can save more and avoid debtsWhen you start saving early you get longer investment tenure. As demonstrated above, this longer tenure, coupled with compound interest yields very high returns. Thus, you can create sufficient savings for your life’s goals. When you have good savings you don’t have to take loans or debts to meet your financial liabilities. You can utilize your investments and avoid paying interest payments on loans.• You can learn from your mistakesMaking mistakes is common. You might make mistakes when you are new to the financial sector. You are learning the ropes and you create a financial plan which, according to you, gives you financial security. However, if your financial plan falls apart, you have a time advantage. You can take rectifying measures and rebuild your financial portfolio. Since you have time on your side, rebuilding another financial plan would not put a dent on your financial goals. You can learn valuable financial lessons from your mistakes and plan your finances for the future more carefully. Thus, early financial planning lets you rebuild your financial portfolio and your mistakes don’t prove financially hazardous.Conclusion A financial plan is necessary to handle your finances better. Ideally, you should resort to financial planning when you start earning. However, even if you have been delayed in formulating a financial plan, don’t wait any longer. Start at the earliest and reap the benefits of having a good financial plan to back your goals.DislcaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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Keeping tax implications in mind while selling investments

Posted by Mehul Kothari | Published on 01 Jan 2019

If ‘location, location, location’ is the mantra for success in real estate, then ‘timing, timing, timing’ is the mantra for success in investments. It is very important to get your timing right when you want to sell your investments. The other factor you need to keep in mind is the tax implications of selling your investments. Why this matters?Like it or not, all investments come with a certain tax liability. However, they are not all taxed equally. The taxation differs based on various factors such as the type of investment, the holding period and the investor’s tax bracket. By being aware of these aspects, it is possible to reduce your tax liability. In other words, you can keep a greater share of your earnings for yourself.Here are a few steps you can take to reduce your tax liability:1) Why are you selling?There always comes a time when you may want to sell your investments. At that point in time, ask yourself the reason why you are selling. Are you selling to fund an expense in your life (buying a house or paying college fees for your children) or do you want to book profits and exit from the investment? If the answer is the latter, it is best to book your profits when the market is at a high. For example, if you have invested in an equity fund, it can be quite beneficial to sell the fund and book profits when the market is on a bull run. This way, you can maximize your returns on the investment. 2) What investment to sell?As an investor, it is possible that you have invested in many different assets. You would have invested in equity funds, debt funds, balanced funds and so on. When you plan to liquidate investments to fund a financial goal, it is important to choose wisely which investment to sell. As mentioned earlier, different investments attract different tax rates. Here is how the time limit is classified for different mutual funds. Identify which rates are applicable for the different investments. For example, the short-term capital gains (STCG) tax on debt funds depends on the income tax slab you come under. However, equity funds are charged a flat STCG of 15%. So, compare the different tax rates and identify the net tax liability. This way, you can make the most tax efficient decision when you decide to sell. 3) Can you delay selling?Imagine your son’s wedding is in a month’s time and you need Rs 25 lakh to finance the wedding. That’s a time bound financial expense. Similarly, you may have other expenses that have strict timelines. As a result, the only solution may be to sell your investments immediately to raise the money. But what if the decision to sell is not time bound? Is it possible to delay the sale? Ask yourself this question because it can help you save tax. For example, by deciding to delay selling of a fund, you would attract LTCG instead of STCG. In most cases, LTCG tax rates are lower than STCG. However, it's always best to look at the actual tax liability. For example, if you are selling a debt fund, the gains are taxable as per your income tax slab rate. The LTCG is taxable at either 10% flat or 20% with indexation. If you fall in the 5% tax bracket, then STCG would be preferable. But if you fall in the 20-30% tax brackets, then LTCG would be more tax-efficient. 4) Can you spread out your sale?Another good option is to spread out the liquidation through options such as Systematic Withdrawal Plans (SWPs). An SWP allows investors to withdraw a specific amount of money at regular intervals. SWPs allow investors to access money when they need it so that they can meet their financial needs. Now, it is possible to spread an SWP over financial years. For example, let's say you started a six-month SWP in January. Then, half the profits would be taxed in the financial year ending in March. The remaining would be taxed in the next financial year. While this may or may not help lower your final tax outgo, the tax payments can be spread out, thus earning you a temporary relief.ConclusionThe above points help you identify the tax implications you need to consider when you make a sale. However, remember that these shouldn’t be the sole factors for you to consider when you sell an investment. For tips on when to sell, read here.What next?It can always be useful to have professional advice regarding your personal financial affairs. In the next article, let’s see how you can use wealth managers and financial advisors to your benefit. DislaimerInvestment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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  • Tax Saving FD – Know About Tax Saving Fixed Deposit
    Posted by Mehul Kothari | Published on 14 Jan 2020

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