5 Tips for Financial Planning for First Time Investor:

The proverb “saving for a rainy day” emphasises setting aside money in case of unforeseen difficulties accompanied by financial issues. 

Let’s talk about something super important – saving for a rainy day. We all know life can throw unexpected curveballs our way, and having a contingency fund can help us bounce back from any financial setbacks. Plus, it’s just one of the many reasons why having a solid financial plan is crucial! 

But here’s the thing – your contingency fund needs to be easily accessible, like ASAP. So forget about investing in real estate or other illiquid assets – you need cold hard cash. As a general rule of thumb, aim to have at least 6-8 months worth of expenses saved up. That way, you’ll have plenty of time to figure out your next steps without stressing about money.

Financial planning is more than just putting money aside each month in a savings account. So, once you have built up your contingency plan, then you have to think about wealth-building.

Wealth building is only possible when investments not only outperform inflation but also provide substantial returns over it. Inflation is one of the most significant hurdles to wealth building. A solid, focused investing strategy is required to ensure that your money’s purchasing value is not destroyed.

If you have only recently begun your professional career and are seeing income credits, you must think ahead and begin your financial preparation. 

Keep in mind 

The five (5) financial planning rules listed below can help you navigate and map out the best plan for yourself:

1. Define your Goals

Did you know that if you don’t set any goals, you’ll just end up wandering aimlessly? It’s like going to the grocery store without a list – you’ll just end up buying a bunch of random stuff that you don’t really need. So, if you’re a 25-year-old married dude and you want to retire at 50, you gotta figure out how much money you’ll need. And let me tell you, opinions on this vary like crazy. But, if you want to play it safe, you should plan on needing about 80% of your pre-retirement income. That might sound like a lot, but don’t worry, there are plenty of ways to save and invest your money to make sure you’re on track. Trust me, you don’t want to be that guy who has to work until he’s 80 just to make ends meet. So, start setting those goals and making a plan now. Your future self will thank you.

If you’re planning on having kids or already have them, you need to think about education costs. I know, I know, it’s not the most exciting topic, but trust me, it’s important. Kids are always changing their minds about what they want to be when they grow up, so it’s crucial to keep an eye on their interests and abilities. That way, you can invest in the right child investment plans to support their education. And let’s be real, college isn’t getting any cheaper. So, start saving early and take advantage of any tax-advantaged accounts available to you. 

2. Learn about taxes

It is important to know about taxes, before starting to invest, as investment, returns from it and taxes go hand-in-hand. There are 3 parts of investment and each part of it can be treated differently during tax calculation. 

a. Invested Amount

b. Interest

c. Maturity Value

If the invested amount is deductible, from your taxable income, it can be said that the amount is Exempt (E) from tax. If the interest from the investment is taxable it is termed as Taxable (T). The amount received on maturity may be taxable (T) or exempt (E).

i. EEE: Insurance Plans, Unit Linked Insurance Plans (ULIPs), Equity Linked Savings Scheme (ELSS), and Public Provident Funds (PPFs) fall under this category. This is the best place to be in as all components of the investment are exempt from taxes.

ii. ETE: In this category, the interest is taxable whereas the invested amount is deductible from taxable income thus reducing the tax payable. Even the amount received on maturity is exempt from taxes. The 5-year tax-saving Fixed Deposit (FD) offered by Scheduled Commercial Banks is the best example of tax exemption on investment and withdrawal.

iii. EET: The National Savings Certificate (NSC) is one example of the Exempt-Exempt-Tax (EET) mechanism where only the maturity proceeds are taxed. 

EEE is the absolute BEST choice for your financial future! Not only do you get the amazing opportunity to save on taxes at every stage, but the investment opportunities and financial instruments available in this category are truly unmatched. 

3. Invest Regularly, maintain the discipline

Saving money is a journey that can take a lifetime to master! It’s important to make it a habit to save before you spend, and to try to save at least 30% of your income each month. If it’s not an emergency, don’t compromise on your monthly saving goal. I know it can be hard to save, but it’s worth it in the long run. Try to think of it as an investment in your future. You can also find ways to save money in your everyday life, like cutting back on eating out or shopping for deals. It’s all about being mindful and making smart decisions.

4. Make SMART goals

You know what they say, “if you can’t measure it, you can’t manage it.” It’s true! If you want to reach your goals, you need to have a way to track your progress. That’s where SMART goals come in. They’re specific, measurable, attainable, realistic, and time-bound. Basically, they’re the perfect recipe for success.

a. Specific: I made the down payment for my new house! It’s a big step, but I’m excited. The only thing is, I have to pay the rest of the balance after 2 years. And get this, it’s 20% of the balance amount! That’s like Rs. 10 lakhs! I mean, I know it’s a lot of money, but I’m sure I’ll figure it out. Maybe I’ll start a lemonade stand or something. Kidding! But seriously, this is a specific reason for investment.

b. Measurable: Hey, have you thought about retirement yet? I know it seems like a long way off, but trust me, it’ll be here before you know it. And if you want to enjoy your golden years without worrying about money, you need to start planning now.

Here’s a little tip: aim to get at least 80% of your current income as cash flow from your retirement corpus. So, if you’re making Rs.1 lakh/month right now and want to retire in 20 years, you’ll need a kitty of INR 2.5 Crores. Sounds like a lot, I know, but progress is measurable, and every little bit you save now will add up over time.

Don’t wait until it’s too late to start planning for retirement. Trust me, your future self will thank you for it.

c. Attainable: Listen up, my friend. If you’re sitting there dreaming about hitting a net worth of INR 1000Crores in the next 12 months, you might want to snap out of it. I mean, unless you’ve got some kind of secret money-making scheme up your sleeve that you’re not telling me about. But seriously, setting unrealistic goals is just going to leave you feeling disappointed and discouraged. 

Instead, focus on setting attainable goals that will help you move towards that big, lofty dream. Break it down into smaller milestones that you can actually achieve. And don’t forget to celebrate those small wins along the way! 

d. Realistic : So, I’ve been dreaming about starting my own venture in the Caribbean Islands for a while now. But let’s be real, it’s not as easy as just hopping on a plane and starting a new life there. I mean, I’m a qualified Chartered Accountant with a stable job in India, and I’ve only just started earning. Plus, I’m getting married soon, so I can’t just up and leave everything behind.

But hey, that doesn’t mean it’s impossible. I’ve been doing some research and there are ways to make it work. For starters, I could look into remote work opportunities or even start my own business online. That way, I can still earn a living while living my dream. 

Of course, there are risks involved and sacrifices that need to be made. But isn’t that what life is all about? Taking risks and chasing your dreams? I say go for it, but also be smart about it. Plan ahead, save up, and make sure you have a solid plan in place before making any big moves.

e. Time-bound : Goals without a timeline are like a pizza without toppings – boring and unappetizing. Trust me, I’ve tried it. When you don’t set a deadline for your goals, you’ll find yourself procrastinating and losing interest faster than a squirrel chasing after a shiny object. So, my advice to you, my friend, is to define a timeline when you define your goals. It’s like adding extra cheese and pepperoni to your pizza – it just makes it better. Plus, having a deadline will give you a sense of urgency and motivation to actually work towards achieving your goal. So, don’t be a plain cheese pizza, spice things up and set a timeline for your goals.

5. Convert savings to investment – automate the process

So, you wanna start investing and make your money work for you? Well, let me tell you, it’s not as hard as it seems. The key is to automate your savings and have a defined allocation process. That means knowing where your money is going and making sure it’s going to the right places. 

If you’re young, like 25, you should be investing a larger proportion into equities. And don’t just pick any old portfolio, make sure it’s managed by credible fund managers. You don’t want some shady character handling your hard-earned cash. 

But here’s the thing, you can’t just set it and forget it. You need to review your portfolio on a regular basis and adjust your allocation. That way, you can take advantage of the bull run and watch your money grow. 

Trust me, it’s worth it. And who knows, maybe one day you’ll be able to retire early and sip margaritas on the beach.

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