What is Financial planning?

FINANCIAL PLANNING

Financial planning is a broad term and investing is just a chapter in it. Financial planning is all about listing down all you sources of finance, assessing your financial needs for the future, assessing your appetite for risk and then charting a plan to achieve your dreams. It also involves planning for your child’s future , your new home, planning for tax and retirement. So, it’s a very broad term and you might need an expert to draw it for you.

FINANCIAL GOALS-LONG TERM VS SHORT TERM

When you chart your financial goals for the future, it important to classify them into short term goals and long term goals.  A short term goal is anything that needs to be done in , say , 5 years. For example – buying a 3 BHK flat. Any financial goal like your son’s higher studies or your daughter’s wedding which has ample time left to think and plan, can be said to be a long term goal

WHAT’S THIS  FUSS ABOUT? WE ARE AWARE OF ALL THIS.

..But still, the importance of financial planning needs to be emphasized in today’s world. Today, the work pressure is so high that people want to opt for early retirement from their full time jobs, preferably in their mid 40’s or early 50’s. They have realized the importance of living their life to the fullest. Thanks to advancement in medial sciences, the average life expectancy has increased to 70 or 80 which means that a person who has retired at 50 has another 30 years to live, without depending anyone  (Preferably!).

Financially, this means  that during you working life, you should create wealth enough to help you maintain the same standard of living after you retire and also take care of your medical expense which keeps going high as you get older. Planning for all this is definitely a difficult and disciplined task. Such a target  is not easy to achieve and it requires meticulous planning and disciplined carry through. That’s why financial planning is so important.

DO I NEED A FINANCIAL PLANNER?

May be or may be not. That depends on who you are. A financial planner is a person who is an expert in his field. It’s better if you can consult a financial planner because even though it’s possible that you are well versed in finance; you’re still not a financial planner. A planner will be able to analyse of your current financial situation quickly and suggest   recommendations that are right for you. There are also personal finance magazines and self-help books to help you do your own financial planning. At the end of the day – the right amount of money should be at your disposal at the right time.

Seek the services of a financial planner if:

  • You find it difficult to analyse your risk profile. Most of us are not fully aware of where we stand in terms of risk.
  • You don’t have time to do your own financial planning.
  • You want to take a professional opinion about the financial plan you have done.
  • You think that you should improve your current financial situation but still don’t know where to begin and how to implement those changes.

FINANCIAL PLANNING ISN’T JUST FOR THE RICH

All right, anyway I don’t have much money to invest. What’s there to plan? If you’re thinking on these lines, you’re wrong. People with limited income should definitely plan you finances – at some point of time you need to get married, buy a home, raise children and look after your ageing parents. The rich will always manage all this even if they haven’t planned their finances properly. But if you’re from a middle class background, you just cannot ignore financial panning.

Basic financial planning is not so complicated. If you have loans first pay them off at the earliest. Loans will anyway carry a higher rate of interest. Be debt free. That definitely is the first step. Then , think about how much you can save. Start a recurring deposit. Accumulate small amounts fro your monthly income even if you have to live on a shoe string budget. Two years down the lane, you’ll find that you’ve done a good job accumulating some money. Once you have some cash, start a systematic investment plan. Take insurance policies. Buy gold when ever you can, even if it is a tiny piece. You’ll be on your way …

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What should be the right mindset for investing?

WIN ALL THE WAY ?

You cannot have a ‘Heads I win , tails you lose’- attitude when you start investing. Unfortunately, that’s the attitude of many investors when they invest. They want to win all the time. That’s not a positive attitude to have. (Of course, nobody want’s be on the losing side)

Think about it. Is it possible to be on the winning side every time? in that case, who will lose ? to win all the time is an illogical thought. Realize that every time you invest, you will be investing in a group of assets. Some may prove to be good picks whereas some others may not perform at all.  You may have a mix of rising and falling investments and hence, all probability, you’ll have an overall portfolio that may perform somewhere between the best and the worst.

As you start investing, it’s important to have a positive outlook. It’s natural for investors to look back and see missed opportunities that were knocking at them. A simple investing indecision may leave an investor wondering how his life would have been different if he had made the right choice. That’s how every investor’s life is – it’s always understood backwards. However, it’s important not to curse yourself or think negatively. Golden misses are part of every investor’s life. Realise that Self-inflicted psychological damage is difficult to overcome.

So, keep these simple thoughts in mind while you invest –

  • Make sure that you have done your home work well. When you invest your money, you should be clear about the objective- how much profit do you expect? How much time will you hold on to it? Why are you buying it –do you have enough reasons to justify your actions? Most importantly, how much loss are you willing to tolerate?
  • Always try to avoid pointless conversations about what could have been done. Don’t look at the past and count the profits you lost because of a wrong decision you made.
  • Realize that however badly you have done, it could have been worse.
  • Instead of analyzing individual investments, evaluate your entire portfolio. You might have lost in one, but won the other.
  • If you are invested for the long term there is no point in getting worried over the current value of your investments. Current value may be down due to various reasons.
  • If you have been experiencing a streak of good luck, it’s better to slow down. Do not rely on your instincts or gut feeling or excellent luck every time.
  • Cook your own recipe for achievement. Sure, a sound knowledge in every aspects of investing is required to produce a good result. You have to learn from others, use books and web based material a lot. But, make sure you are using the right resources.
  • Investing is a tough and serious business. On the contrary never be too hard on yourself. Relax. Have fun.   Keep your mind clear and concentrated. Having a positive mindset can give you immense results and at  the same time, have fun while you earn your bucks.
  • Always focus on the positive aspects of what you have done.  Take investing like a sport where you win in some games and you lose in some other. But be sure to learn from both experiences-and never forget what you learned.

If you would like to learn more about investing,  check our beginner’s lessons for simple, to-the-point lessons.

Happy investing!

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When should you start Investing?

No need for any calculations or discussion here. The simple answer to this question is – As early as possible !

WHY?

  • One- Delaying to plan for the future would mean investing more later to keep up with what you’ve missed
  • Two- when you start early, it allows you to take more risks and aim high returns.
  • Three- If you fail to plan NOW, you plan to fail LATER.

It’s always better to maximize savings in your early years. As you grow older, it would be difficult for you to commit more money due to responsibilities.

Not having enough money may not be an issue when you start investing early. Even small sums put aside regularly can build a handsome corpus over a period thanks to the power of compounding.

Here’s a simple calculation- Suppose you want to have Rs 50 lakhs when you are 55. If at 25, you set apart Rs 3,500 every month (assuming a return of 8 percent), you would be on your way to achieving this goal. But if you were to put off this investing decision by 10 years, you would have to invest as much as Rs 8,500! Setting aside a higher sum when you have other commitments would be a tough task (in most cases –effectively impossible).

Maximizing saving in the initial years doesn’t mean that you should live the life of a miser.  You must spend money for pleasures- but in a self disciplined way. Investing from early on could give you regular, handsome sums at various stages of your life. It merely postpones your spending. Begin investing now, and you might have more money in your hand in your thirties, when you may want to spend on something substantial- For example, a new flat/villa for your family.

The biggest advantage of investing early is that it allows you to take risks. What you thought would be a jackpot may turn out to be a crackpot. But, you can write it off to experience without too much agonizing. Later in your life such a loss could be expensive, and you would also have less time to rebuild your wealth and recoup your losses.

Don’t know how to find money to invest? Click here for a perfect tip. It works !

The world of investing is very interesting. Investments, if properly done, would help you earn more money than you thought. Would like to learn more? You’re at the right place. Our beginner’s lessons are for you.

Have a nice day!

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Introduction to financial ratios

Financial ratios are used to evaluate a company- Its Financial Strength, Management effectiveness, Efficiency and Profitability.

Ratios look at the fundamental financial aspects of the company. It gives you an idea about –

  • The current financial position of the company
  • where the company ranks among its peers and if it is properly priced by the market as reflected in its stock’s price
  • Overall, it helps you to decide if a particular company is worth getting involved with.

Since, ratios look at companies from the fundamental level; ratio analysis is also called fundamental analysis. Many investors use fundamental analysis alone or in combination with other tools to evaluate stocks for investment purposes. The ultimate goal is to determine the current worth and, more importantly, how the market values the stock.

There are at least 12 financial ratios you should understand to evaluate a company.

This article focuses on the key tools of fundamental analysis and what they tell you. Even if you don’t plan to do in-depth fundamental analysis yourself, it will help you follow stocks more closely if you understand the key ratios and terms.

It is enough that you understand all these ratios, its meaning, components and relevance. Most of the ratios need not be computed since these form part of the financial statements. All these ratios are available in the internet from various financial websites and magazines.

My favorite site for picking up ratios

To get all the non financial and financial datas of Indian companies, my favorite sites are -

1. Moneycontrol.com

2. In.Reuters.com

List of key ratios :

  1. Earnings per share or EPS
  2. Price to Earnings Ratio – P/E
  3. Market capitalization
  4. Price to Sales – P/S
  5. Price to Book – P/B
  6. Dividend Payout Ratio
  7. Dividend Yield
  8. Book value
  9. Return on Equity
  10. Interest coverage ratio
  11. Current and quick ratios
  12. PEG ratio

Till my next post on ratios …

……have a nice time..!!

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