The first step to financial thinking is understanding why everyone of us needs to plan our finances.
This has been explained in my earlier article “Importance of Financial Planning”. The next natural sequence would be where & how does one start. First of all, one needs to decide one’s financial objectives or goals, which include, At what points in one’s life would one require money? For e.g. maybe for one’s marriage, for one’s children’s education or marriage or maybe providing for one’s retirement or for any kind of contingency, etc. Also one needs to consider, in case of the unfortunate event of the demise of the breadwinner will the family be able to continue the same standard of living and also complete the family’s financial goals which they have dreamt about.How much does one need for each requirement? One has to quantify each requirement as per each person’s need with a date on it. Each person’s need would be different depending on his status of living, his capacity to earn, so on & so forth. It has to be definite. For e.g. I need Rs. ½ Million on 1st Nov 2015 for my son’s education, Rs 0.10 Milion as contingency fund to be accumulated in one year, Rs.25 Million by the time I retire in 2025 or Rs. 10 Million for starting a business in 2020, etc.How much has one already invested so far for achieving these goals?Once the objectives are spelt out clearly and quantified, the next step would be to identify the capacity to save & invest.Apart from the above, many people think that ‘I have just started working let me enjoy for a few years, then I will start planning’. Such people never plan and repent when it is too late. When does one ideally start saving and investing? How do Savings differ from Investing? One should plan and start investing as soon as one starts working. If one starts doing this, a lot can be achieved by setting aside even a small part of one’s earnings every month in a disciplined manner i.e. even a 10% could suffice.Savings is keeping aside some portion from one’s earnings. But unfortunately, today by just saving and keeping the fund in a Bank one cannot achieve one’s financial goals. Saving has to be invested wisely in diversified assets to get the best returns in a tax effective way and allowing such risk that one can tolerate.Who needs to plan? Every one of us would be better of if we start thinking and planning our finances and implementing our plans. The Only person that need not plan is one who has funds such that generations can survive without moving a muscle.The writer can be contacted on sithavaid@gmail.com in case of any clarification or guidance.