The twenty’s- Right time to start financial planning!!

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‘22-24’ – That age of a person often characterized by ambition and enthusiasm; when one just out of the world of education focuses on the riches of investments and sets the primary goal of reaping maximum profits.

Though not wrong, it is still vital for one to realize that he is earning with a purpose. Earning extra notes maybe significant for the wallet, but it does not outweigh the importance of lifetime planning. Lack of awareness clubbed with ignorance is the cause of inappropriate decision-making regarding finances resulting incrisis.


First, these young independent professionals should be made aware of the need to recognize their financial goals. Second, they should comprehend the difference between ‘risk aptitude’ and ‘risk capacity’, and why the latter is the deciding factor during the formulation of a plan. For instance, a person who hails from a steady financial background and happens to earn well, has a higher risk capacity, as a loss in a certain investment will not hurt him very severely. However, an individual earning relatively less and having the responsibility of his family shall be likely to have a higher risk ‘aptitude’ to target more income, though his capacity may speak otherwise. Any loss will severely hit him and his family.

How much a person earns is immaterial, how much he saves is what defines the amount of wealth he has created. Once he starts working, he should be aware of the significance of instruments like the Employer Provident Fund and the Public Provident Fund. These are instruments of ‘forced savings’, the benefits being enjoyed during retirement. The employees should be aware and in case of a switch should transfer the previous account instead of opening a new one with their new employer.

With the risk capacity assessed and goals in mind, they should learn the proper technique of asset allocation, which consists of three factors: -
(i) Proportion of investment in each instrument (ii) Time Horizon (iii) Return expected.

Ideally, a young person who has just started off has time and a wide horizon. Therefore, he should have a major portion invested in equity; the allocation tilting towards debt instruments once he starts aging and approaching retirement. Investments in real estate are appropriate for those with a time horizon of over a decade. Fending for one’s daily needs should be top priority. One should also keep into account his post-married life, responsibility of children, their education, their wedding in future, as well as the retired parents.

In the midst of planning for maximum returns, people should also understand the importance of securing their lives. Insurance is an integral part of one’s life. Covering for the risks of one’s life and assets is as important as acquiring them.

Once an individual becomes the breadwinner for his family, life insurance becomes indispensible. The only sacrifice in play is the minimal amount paid off as premium. But one is at least spared of the worries of any unforeseen event occurring in future. Normally the one preferred by most people are the Term Plans in which only the sum assured is covered. The other option is one that covers investments. These are basically Endowments and ULIP schemes, in which the company invests the premium amount and a proportion of returns, are paid to the policyholder.

Yet again, this is where the risk capacity comes into play. In case an individual is aggressive enough to go for Endowment/ULIPs, he should have the appropriate risk capacity. He should study the schemes and do a cost-benefit analysis as to whether the money paid and the amount earned in return is worth.

Furthermore, health is another indispensible concern for an individual. Therefore, medical insurance for one and his family is also important. Usually, many companies offer group Mediclaim policies in which the employees and their families are covered under a single policy.

Lastly, once a person progresses in life and accumulates assets such as a house or a vehicle, getting them insured against potential damages will serve the purpose of the hassles of repairs and replacement.

An individual should build a clear picture as to what is essential for him. Investing in wrong instruments may tantamount to insufficient returns. Therefore, the need of a young independent working professional is careful and responsible planning for his future by wisely investing in the right instruments.

By Siddhant Mishra

 

Make a Financial Plan


Comments  

 
0 #2 Siddhant 2012-11-30 06:11
Thanks a lot!
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+2 #1 Amrita 2012-08-24 15:01
Excellent article!
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