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Monday, December 31, 2012

Resolution No. 1: Make A Financial Plan This Year

Understanding long-term needs and saving for them should be your first priority


    As New Year draws near, most of us make resolutions. But we often end up doing nothing to implement them and, suddenly, realise another New Year is just around the corner. Some resolutions fail because of circumstances beyond your our while we tend to ignore the ones that have long-term consequences. However, that should not be the case with resolutions related to our financial health and goals. 
    "Often we make New Year resolutions so complicated that we already know that most of them will never see the light of the day. Actually, the first resolution should be to make simple, practical New Year Resolutions," said Sanjeev Govila, a retired colonel from the Indian Army and CEO of Hum Fauji Initiatives, New Delhi. 
    "While on other issues we can afford to be light-hearted, we may not be able to afford such frivolity in matters financial, especially with advancing age," Govila said. 
    We propose some resolutions that are practical, have long-term implications for your financial health and also have a shelf-life of more than a year. In Govila's words, they would expire only when you get them right. 
    Most financial planners agree that one of the most important things that every investor should do, but they seldom do, is to maintain a proper record of all investments. "Put all your investments in an organised manner and please involve your spouse/family in it," said Mukund Seshadri of MSVentures Financial Planners. "We have come across cases where after the death of a person, the family and the nominees have no clue about where all the investments were made," he said. 
    One of the important financial 
needs for almost everyone is to have an emergency fund. "Depending on the certainty of your earnings, you need an emergency fund equal to 3-6 times your monthly earnings. Keep it in a place where you can easily access it, like a bank FD or liquid mutual funds," said Govila. 
    Another must have resolution is to write a will. "Age is not a criteria for writing a will and this should start as soon as possible," said Seshadrai. One should not presume that accidents and unfortunate incidents can strike 
only others, and so one should not wait to write a will. "Do not assume that your property will pass on to your intended heirs automatically. Take out those few minutes to write your will now," added Govila. 
    For every family, human asset is probably the biggest wealth builder. So, you should consider making a New Year resolution "to get a health check up done every year for yourself and family and ensure you have an adequate personal health cover, in addition to any office cover that 
you have", said Seshadri. 
    With increasing incidents to mis-selling of financial products, one should also consider having a better look at various investment products before investing. "You should look at investment products and insurance products separately," said Brijesh Damodaran, founder and managing partner, Zeus WealthWays LLP. "You should remember insurance is risk management and investment is wealth creation," Damodaran said. 
    Last, but not the least, you 
should be wiling to learn from your mistakes. Even the best money managers make mistakes, but they were also willing to learn from the same. So as an investor, who is not really well-trained in matters of investment management, "you should realise where you have gone wrong in the past, find out how to avoid the same mistakes, chalk out the correct path and stick to it", said Govila. 
    On this page, Sankar De, a professor of finance who is also associated with the Reserve Bank of India and some other policy making institutions, in a two-part article tells us the psychological barriers for retail investors to make rational long-term investment decisions, while Jiju Vidyadharan sets forth the case for long-term financial planning for everyone. 
    Here we assume that you have a basic financial plan in place and follow its rules in a disciplined manner. If not, it should be your resolution No. 1. If you are trained enough for such an exercise, do it yourself, or seek professional help. 

NEXT WEEK 
    
With the New Year here, it's also the time to mind one's taxes. Next week, we will look at some of the tax savings options for the remaining three months of the financial year, especially related to mutual funds. 

FIN RESOLUTIONS 
Keep the resolutions simple Document all investments Have an emergency fund Write a will Get health cover Try to better understand fi nancial products Learn from mistakes



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