How to get your financial life on track

Let us take a look at some of the steps that are involved in getting your finances in order.

It is better late than never! This holds true for financial planning as well. You can start at anytime. Of course, it is always better to get your finances in order early, so that you can reap in the benefit for longer period.

Nevertheless, here's how to go about it.

The first and foremost thing you need to do is prepare a budget.

This is a very simple process that involves noting down all your expenses (and proposed expenses) on one side of a sheet of paper and your income on the other side. The income should always be more than the sum of all the expenses; if this is not the case, then it is time to tighten your purse strings and reduce costs.

Next, start tracking your income and expenses for a couple of months to ensure that you are sticking to your budget. This budget needs to be realistic taking into account your lifestyle and spending patterns.

Following a strict budget will assist you in achieving your financial goals.

You should then decide the time period for the financial goals (e.g. education of a child, retirement, etc.) and whether these are short term, medium term or long term goals. A good financial plan lists down the long term and short term goals of a person, and this differentiation helps one to understand and predict future expenditures better.

For each time frame has different instruments and asset classes that must be invested in. Apart from the time horizon, one should also understand one’s own risk appetite and invest accordingly, that is, the lower the risk taking appetite, the more gilt or debt instruments should be used and vice versa.

It is highly advisable to start saving as early as possible as it will give you the advantage of additional years of investing and you can benefit from the magic of compounding.

For example, if a 25 year old saves Rs 5,000 per month at 10 per cent interest, your corpus will be around Rs 1 crore when you are in your mid-fifties. On the other hand, if you start savings Rs 5,000 a month at 30 years (with the same 10 per cent interest), the corpus after 30 years will be only Rs 60 lakh.

One should also make investments via the ECS route thereby making the whole process automatic, and ensuring that no surplus expenditure gets in the way of your investments and savings. It is advisable to invest in mutual funds through systematic investment plans (SIP). A SIP route ensures that one doesn't need to time the market; the investment in SIP takes place each month irrespective of the market condition. Thus individuals can benefits from both an up market as well as a down market.

Life and medical cover are two very important investments that one has to make.

Ideally, one should ensure that there is adequate cover to take care of any debts, and provide for their spouse and children, apart from other dependents such as one’s parents.

It is advisable to go in for this cover early on in life, as the premiums will be lower, giving the maximum cover for the minimum premium.

An important aspect of building wealth is tax planning. One should consult with a tax expert to see the best investment and savings avenues through which one can save on taxes. One should also always ensure that the financial plan does not remain stagnant and is up to date.

Summary:

• Make a budget and stick to it
• Financial plans must be broken up into goals: short, medium and long term goals
• Tax planning is important
• Invest from as early as possible, and via ECS and SIP route

Illustration: Uttam Ghosh/Rediff.com

Anil Rego is the founder and CEO of Right Horizons, an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.