Step by Step guide to Financial Planning
Financial planning helps you be prudent with your money and achieve your life targets. Although it is a simple process, it requires proper planning over a period of time. That’s because it comprises several steps. Each step has a particular objective. One misstep and your financial plan could be in tatters. It’s just like a house of cards. You remove one card and the whole house falls apart. Therefore, to create a successful financial plan you should follow each and every step in the correct order.
Are you familiar with these steps? Do you know how to prepare a financial plan? Worry not, this piece will give you a step-by-step guide in preparing your first financial plan.
Step 1 – Set your goals
Identifying your goals at the start can give you a sense of direction. Unless you know why you should save, your savings will not hold much importance. So, whether it is buying that trendy car, building your own home or setting aside money for your daughter’s wedding, identify your financial goals.
Step 2 – Plan your taxes
Tax-planning can ensure you have more money in your bank account. So, why do you want to give away your hard-earned money in tax? There are various tax-saving investment instruments available in the market. These instruments can give you tax exemption not only on the amount invested but also on the returns generated.
Step 3 – Create an emergency fund
An emergency fund can bail you out in tough times. It gives you a financial cushion in case of an emergency. So, hold at least six months’ worth of your income in an easily liquid investment option. Liquid mutual funds can be ideal.
Step 4 – Think insurance
You should also think of getting a health and a life insurance plan. While a health plan can take care of your medical emergencies, a life insurance plan will give your family financial stability in your absence.
Step 5 – Invest
This is when you think of investing your money. Know the risk involved, the returns you are likely to get and its tenure before you zero in on an investment option.
Step 6 – Invest for each goal separately
Choose separate investment options for your short-, medium- and long-term goals. You should not park all your money in one investment option. Different investment vehicles serve different needs. So, do some research, learn what each option’s forte is and then invest. For example, investing in equity or equity fund is not advisable if you want to achieve a short-term goal. Instead, invest in them for the long run. That’s because equity tends to be volatile over the short-term and generally steady in the long run. Therefore, your investments and goals should not obstruct each other.
Step 7 – Review your plan from time to time
Your goals are dynamic and so are your financial requirements. Hence, your financial planning should be dynamic as well. So, review your financial plan periodically and make necessary changes to suit your requirement.
So, is it difficult? No. You just need to follow a few steps to reap benefits of financial planning. It is just the lack of knowledge which makes the process seem difficult.
Alternatively, you can choose to get professional help from a financial planner. IndiaNivesh’s financial planning team can always help you plan your finances and investments.
What next?
Financial planning. Tick. Next chapter will explain how budgeting is different from 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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Keeping tax implications in mind while selling investments
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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Optimise and not maximise tax-saving
Many people invest only to save tax. They don’t check whether the investment can yield good returns. By doing this, they are merely maximising tax-saving. But the flipside is that they waste an opportunity to build their wealth. Instead, what one should do is to optimise their tax-saving options. This article will explain what optimisation of tax-saving means and how you can do it. But before we dive into it, let’s look at what people generally do to maximise tax-savings. This will provide a contrast for better understanding. What people usually do People try to maximise tax-saving by using deductions and exemptions allowed under the Income Tax Act. • They take help of Employer’s Provident Fund, children’s tuition fees, insurance premium etc. to save tax, thanks to Section 80C of the Income Tax Act.• They also buy a high-value health insurance plan to get tax breaks under Section 80D.• They invest in National Pension Scheme (NPS) only because it provides an additional Rs 50,000 tax benefit.• They give money to charities because donations are tax-exempt.• They also claim additional tax exemption if they are repaying their home loan. This is how they get tax breaks for repaying the debt: a. They save tax up to Rs 1.5 lakh if they are repaying the principal component of the loan. If one is a first-time home owner,the tax exemption is up to Rs 2 lakh. However, in this case, the property should be less than Rs 50 lakh and the loan amount should be less than Rs 35 lakh. b. Furthermore, they claim tax exemption for paying the interest component of the loan. The Income Tax Act allows tax deduction of up to Rs 2 lakh. This is what people usually do to save tax. But this isn’t how it should be done. If you follow a few steps, you can optimise your taxes and also invest as per your financial goals. After all, you should invest to increase your money. Saving tax should be a by-product, not the primary focus, of investment planning. What should be done• House rent allowance (HRA), Leave Travel Allowance (LTA), meal allowance, medical allowance, etc. are a part of your salary. These components are tax-exempt. So, use these exemptions to reduce your taxable income.• You should choose a tax-saving investment after weighing the post-tax returns. You also need to check whether the investment is helping you achieve your financial goals. If not, you are merely frittering away your money. Remember, investments should primarily build wealth. Saving tax is secondary. This is what optimisation is all about. Some important points to note: • While optimising, consider the hidden aspects of taxation as well. For example, opting for the dividend option in debt mutual funds can give you tax-free dividends. But, the dividend amount will attract DDT (dividend distribution tax) of about 28.84% to be paid by the Fund. So, keeping in mind the net tax rate, it could be more beneficial for a person in the 30% tax slab. After all, the others would otherwise pay a lower income tax of 5-20%. • The National Pension Scheme gives an extra tax deduction of Rs 50,000. But, at the time of retirement, 40% of the saved money needs to be converted into annuity (a fixed amount paid from time to time to retirees). This may not be tax-efficient because the annuity you receive will be taxed. Therefore, you should look for investments where the returns are also tax-free. These are some of the tricks of the trade when it comes to saving taxes. If you want to learn more, you can take help of IndiaNivesh. What we can do for you1) IndiaNivesh Securities Ltd. is a 360-degree financial planning services. We have expertise in investing and tax-planning. 2) We have extremely scientific and well-researched processes for product selection, which are unbiased and algorithm-oriented 3) We give utmost importance to your risk profile and asset allocationDisclaimer Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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