Shishir Chaturvedi
Managing the finance is the need of time but inherent intricacies and complex nature of different available options makes it difficult to manage a person’s finance on its own.
Due to such complexity and necessity of managing the finance; peoples are tend to avail services of financial consultants. But it is also not a good idea as financial consultants are charging a decent amount for managing one’s financial matters and one has to disclose everything to his financial consultant.
By considering the above necessity and problems in managing the finance; this concept paper is designed to meet one’s financial management needs. In this concept paper we shall discuss different available strategies and options.
This paper is designed for the age group of 25-30 (Men) as this is the most exposed age group to accumulate one’s finance or totally wipe out even inherited wealth.
Before going further we shall take a little break here and shall understand; what is Finance, financial management and personal finance?
Finance:
Finance in the layman’s terms can be defined as the source of study for one’s monetary needs, allocation of available fund for special wishes, maximization of returns and resourcing the fund for unexpected events.
Financial Management:
One needs money to make money. Finance is the lifeline for one’s survival. A person needs finance for his well-being, social status, short term and long term commitments, future goals etc. There must be continuous flow of funds to manage all the affairs. Sound plans, efficient implementation and administration are all dependent on smooth flow of finance. Hence, a financial plan needs to be prepared, which indicates the requirements of finance; sources for raising the finance and the application of funds. Financial planning at the early age provides the independence at retirement. A Financial plan begins with estimating the total amount of fund required by a person for the various needs or financial goals.
Personal financial planning is the process of managing money to achieve personal economic satisfaction. This planning process allows controlling financial situation. Every person, family, or household has a unique financial position, and any financial activity therefore must also be carefully planned to meet specific needs and goals.
A comprehensive financial plan can enhance the quality of life and increase satisfaction by reducing uncertainty about future needs and resources. The specific advantages of personal financial planning include
- Increased effectiveness in obtaining, using, and protecting financial resources throughout one’s lifetime.
- Increased control of financial affairs by avoiding excessive debt, bankruptcy and dependence on others for economic security.
- Improved personal relationships resulting from well-planned and effectively communicated financial decisions.
- A sense of freedom from financial worries obtained by looking to the future, anticipating expenses, and achieving your personal economic goals.
We all make hundreds of decisions each day. Most of these decisions are quite simple and have few consequences. Some are complex and have long-term effects on our personal and financial situations.
The financial plans should be formulated by taking into consideration the following factors:
- The financial objectives.
- Nature, size and timing of the requirement of fund.
- The image and credit-worthiness of a person.
- Government regulations.
Personal Finance:
When the above activities are being done at a micro level keeping the financial needs of a person in mind, it becomes personal finance.
All financial decisions and activities of an Individual those include budgeting, insurance, savings, investing, debt servicing, mortgages etc. Financial planning generally involves analysing current financial position and taking care of short-term and long-term financial needs.
Personal finance is a tool to check that how an Individual’s money and future needs are managed. Personal finance would include monitoring the spending, meeting the contingencies and paying the debts.
Strategies of Personal Finance for the Age Group of 25-30(Men)
Process of financial planning starts with the assessment of one’s Financial Objectives (Personal needs).
In the 25-30 age groups it is just the time for starting-up of one’s life and at this point of time one should clearly define his financial needs for future by easing the short-term financial needs. One should make a clear assessment of his present financial position and accordingly plan his future expenditures. Some basic things to consider at this point are as under:
- At this age group the first and the foremost goal should be the Financial Independence from Parents:
At this age group one should secure a regular flow of money either by way of job or business. Initially regular stream of money should be enough for one’s personal expenses and bear and tear. Though the parents are always like to and pleased to help but over a period of time it becomes burden on them. Begging before parents for every need also becomes a hindrance for establishing oneself as financial independent.
- Get Insured:
One should always have an insurance policy of sufficient amount for meeting with any unexpected bad events. The insurance policy should provide life cover as well as medical claims.
- Clear career Path:
By his 30 one should clearly identify his career pattern as more and more experiment with career may destroy career and ruin everything.
- One Should be debt free:
At this point of time one should always try to be debt free and if any unexpected debt occurs then one should try to overcome it as soon as possible. An early debt is a hindrance of being financial independent. It is better to have no fund instead of being under a debt.
For keeping oneself afloat from debt one should keep tap on his spending and it is better to have a budget for every need. If a person has some educational loan/ personal loan etc. it should be paid before 30.
- Have a budget for everything:
At this age group generally people have new job, a handsome pay package and no guidance that how to manage their money. At this point people generally want to have branded clothes, shoes, watch, bike, car, girlfriend etc. But in the hurry of getting everything generally it ends in no money or debt situation.
For avoiding such conditions one should define his short term and long term needs and accordingly allocate his fund by way of a budget. One should not deviate with his budget and should also have control on his credit card bills.
- Make investing a hobby:
At this time one should make a habit to regularly save and invest some amount from his income. The early saving gives much more return than expected on a later period of life. Early saving automatically taps the spending and compounding of interest shows its magic at retirement.
An early saving is also necessary in view of the no personal responsibility or low responsibility at the stating as it become very difficult to save anything once people have their own family and children.
- Identify the Short term goals and start saving for them:
People of this age group should clearly identify their short term goals and should start saving for them. The short term goals could be the Marriage, Repayment of Education Loan, buying vehicle, start a venture etc.
- Maintaining a good credit history:
It is necessary to maintain a good credit history with Banks and other lenders as any credit default at the early stage may make it difficult to obtain a genuine loan like Home loan, Marriage loan, Vehicle loan etc.
It is always better to pay credit card dues in time to avoid any negative ratings from banks or financial institutions.
- Have a contingency fund:
Contingencies are unpredictable and may occur at any point of time. It is better to have and maintain a contingency fund to mitigate any unexpected event in future. It is better to save at least 5% of income every year for contingencies.
- Recording of every expenditure:
One should always make a note of his spending. This will provide him details for analysing and controlling the expenditures. Habit of writing cash book will also be helpful to recover amount lend to friends, if any.
- Maximize employment benefits:
One should always maximize his employment benefits like reimbursements of phone bills, petrol bills, medical bills, lunch, dinner, dearness and travelling allowances etc.
- Sharing income, expenditure and savings with partner:
If married, one should gently share his income, expenses and savings with his partner. It is a good practice following in almost every metro to have source of income for husband and wife. All the expenditures should be honoured with one’s income and other’s income should be saved entirely.
- Review and revise plan:
Financial planning is a dynamic process that does not end when you take a particular action. You need to regularly assess your financial decisions. You should do a complete review of your finances at least once a year.
Changing personal, social, and economic factors may require more frequent assessments. When life events affect your financial needs, this financial planning process will provide a vehicle for adapting to those changes. Regularly reviewing this decision-making process will help you make priority adjustments that will bring your financial goals and activities in line with your current life situation.
Nature, size and timing of the requirement of fund
After determining the financial objectives of a person and suggestive due care given by him for accomplishment of objectives. One should also define the nature of, size and timing of planned expenditures.
The nature of the expenditure could be social like engagement, marriage, repayment of ancestral debts etc., personal like buying a bike or car, having a girlfriend, branded accessories, entire new wardrobe etc., or compulsory like repayment of education and personal loans.
After determining the nature of the spending one should priorities them and start allocating the available fund in the ratio of their size.
One should also priorities his expenditure according to their timing. One should make a clear time frame for spending and expenses with fewer amounts should be met first and expenses with high outflow of fund to be met later. Following the time frame would also help one’s keeping afloat from debts.
An old saying goes, “If you don’t know where you’re going, you might end up somewhere else and not even know it.” Goal setting is central to financial decision making.
Financial goals are the basis for planning, implementing, and measuring the progress of your spending, saving, and investing activities. Financial goals should take with S-M-A-R-T approach, in that they are:
S— specific, so you know exactly what your goals are so you can create a plan designed to achieve those objectives.
M— measurable with a specific amount. For example, “Accumulate 50,000 in an investment fund within three months” is more measurable than “Put money into an investment fund.”
A— action-oriented, providing the basis for the personal financial activities you will undertake. For example, “Reduce credit card debt” will usually mean actions to pay off amounts owed.
R— realistic, involving goals based on income and life situation. For example, it is probably not realistic to expect to buy a new car each year if you are a full-time student.
T— time-based, indicating a time frame for achieving the goal, such as three years. This allows you to measure your progress toward your financial goals.
Developing a flexible financial plan:
A financial plan is a formalized report that summarizes current financial situation, analyzes financial needs, and recommends future financial activities. A Person can create this document on his own, seek assistance from a financial planner, or use a money management software package.
Implementing Financial Plan:
A person must have a plan before he can implement it. However, once he has clearly assessed his current situation and identified his financial goals, what does he do next?
The most important strategy for success is to develop financial habits that contribute to both short-term satisfaction and long-term financial security, including the following:
- Using a well-conceived spending plan will help one stay within his income while he save and invest for the future. The main source of financial difficulties is overspending.
- Having appropriate insurance protection will help in preventing financial disasters.
- Becoming informed about tax and investment alternatives will help in expanding financial resources.
The image and credit-worthiness of a person:
As discussed earlier in this concept paper. One should always avoid any credit default and meet his obligations in time. It is always better to be on the top of the monthly bills it save lot of money in terms of charges and penalties. Further once a person goes for applying a real genuine loan like Home Loan Car Loan etc. at that time Banks and Financial Institutions are used to check credit history of the applicant. If any credit default by the applicant found it make it very difficult to avail loan or if some how he got loan then too it is at a higher rate due to the credit default.
Further one should also take care about the guarantee given by him in respect of other’s loan as in that case default made by the other in repaying his debts would also ruin one’s credit worthiness. It is normal to give guarantee for a friend’s loan (in this 25-30 age group) to help him but one should also inquire about the repayment of said loan to hold his credit worthiness good.
Government regulations.
Before deciding anything about personal finance, investment one should also check and follow the applicable government regulations. One should track only those investment options those are acceptable in the eye of law and can maximize his after tax income.
One should also think about the legality of source of Income before acting on them earning money. One should always keep in mind that easy money is not as easy as it appears. If once a person sinks in illegal activities it may take a lifetime to come out from it.
One should also think about the income tax and other applicable tax incentives before investing in a particular investment option. A clear financial return and tax benefit analysis should be in place before jumping on an option. For example in case of Home Loan the Installment and Interest are deductible from Income and provides tax benefits but before availing the home loan one should decide the extent of loan amount which should be commensurate to tax benefits.
At this (25-30) age group sometimes people used to avail loan fund to invest early with a view to avail tax benefits at a later stage. But most of the time it happens that interest burden is higher than the available tax incentives. So one should always analyze the loan fund V/s own fund option for any investment option. Though interest expenses is deductible from income but it is also a burden on the income stream and once if income will not sufficient to meet interest pay out it may sabotage the entire investment plan.
After discussing various strategies and cautions regarding personal finance now we shall have a look on available Investment options in to market.
Investments in Bank Fixed Deposits (FD)
Fixed Deposit or FD is accrues about 8.75 to 9.05% of annual returns, depending on the bank’s tenure and guidelines, which makes it’s widely sought after and safe investment alternative. The minimum tenure of FD is 15 days and maximum tenure is 5 years and above.
Investments in Insurance policies
Insurance features among the best investment alternative as it offers services to indemnify your life, assets and money besides providing satisfactory and risk free profits. Indian Insurance Market offers various investment options with reasonably priced premium. Some of the popular Insurance policies in India are Home Insurance policies, Life Insurance policies, Health Insurance policies and Car Insurance policies.
Investments in National Saving Certificate (NSC)
National Saving Certificate (NSC) is subsidized and supported by government of India as is a secure investment technique with a lock in tenure of 6 years. There is no utmost limit in this investment option. The investor is entitled for the calculated interest of 8% which is forfeited two times in a year. National Saving Certificate falls under Section 80C of IT Act and the profit accrued by the investor stands valid for tax deduction.
The other available option is Kisan Vikas Patra. The KVPs are one type of government bond and backed by government guarantee and risk free.
Investments in Public Provident Fund (PPF)
Like NSC, Public Provident Fund (PPF) is also supported by the Indian government. An investment of minimum Rs. 500 and maximum Rs. 100,000 is required to be deposited in a fiscal year. The prospective investor can create it PPF account in a GPO or head post office or in any sub-divisions of the nationalized bank.
PPF also falls under Section 80C of IT Act so investors could gain income tax deduction. The rate of interest of PPF is evaluated yearly with a lock in tenure of maximum 15 years. The basic rate of interest is determined by the government time to time.
Investments in Stock Market
Indian Stock market is very fluctuating. A smart portfolio positioned for long-term growth includes strong stocks from different industries. Before investing in stock market one should be prepared to assume risk equivalent to sum invested in the market. Investing in share market yields higher profits. Influenced by unanticipated turn of market events, stock market to some extent cannot be considered as the safest investment options. However, to accrue higher gains, an investor must update himself on the recent stock market news and events.
Investments in Mutual Funds
Mutual Fund firms accumulate cash from willing investors and invest it in share market. Like stock market, mutual fund investment are also entitled for various market risks but with a fair share of profits. One should select mutual fund schemes based on all or some of the following criteria:
- Long term and Short Term Performance
- Consistency in Returns
- Performance during bullish and bearish phases
- Fund Managers performance with the fund’s operations
A simple way to select a mutual fund scheme to invest in is to select a 5 star or 4 star rated fund.
Investments in Gold Deposit Scheme
Controlled by SBI, Gold Deposit Scheme was instigated in the year 1999. Investments in this scheme are open for trusts, firms and HUFs with no specific upper limit. The investor can deposit invest minimum of 200 gm in exchange for gold bonds holding a tariff free rate of interest of 3% – 4% on the basis of the period of the bond varying with a lock in period of 3 to 7 years.
Moreover, Gold bonds are not entitled of capital gains tax and wealth tariff. The sum insured can be accrued back in cash or gold, as per the investor’s preference.
Investments in Real Estate
Indian real estate industry has huge prospects in sectors like commercial, housing, hospitality, retail, manufacturing, healthcare etc. Calculated realty demand for IT/ITES industry in 2010 is estimated at 150mn sq.ft. around the chief Indian cities. Termed as the “money making industry”, realty sector of India promises annual profits of 30% to 100% through real estate investments.
At the end I hope that; this concept paper will be useful in meeting one’s financial management needs. Though it has been specifically designed for the 25-30 age groups (Men) but the same may be useful to others also. No matter how old a person is; one always has to deal with financial matters.
