In the earlier article we had just seen an overview on Financial Planning; now let’s go a little deeper.
What was the first step we had to do? Find out your financial situation. You would know exactly how much money you have and how much you owe. In short you would know your net asset value.
The next step was goal setting. I had mentioned that it should be specific and measurable in terms of money. What did I mean by specific? The goal should be clear like I would like to have a car, home or would like to plan for retirement. Now if the goals are specific, they can be measured. i.e. it would be possible to tell which car you want, how big a house you would like to have or how much money you would like to have in case you retire.
Once this step is done, we need to see how much time we have to reach this goal. We need to say I would like to have a car in 2 years, a home in 5 years and retire at the age of 40. Be realistic. Don’t say you want it today, since if that was true, you would not have been sitting here making a plan. You would have already purchased the car, house or retired.
When you put a time frame it gives us an idea as to how much time I have to meet my target.
Once we have these factors in place, we need to check what are the investment avenues you have to achieve the goals? Or how do we go about earning that money.
What is investment? Investment is a method of using your savings to earn an income. Now investing is not the same as saving. When we keep our money aside in a safe place without spending means saving. When we buy something or lend out money in the hope of receiving a higher amount after a certain period of time, its called investing.
Taking your money and putting it into fixed deposit is saving. But putting the same into Equity mutual funds is investing. Now some might say I can do that by buying and selling shares on the stock exchange. Yes you can, but that is not investing its trading. If you buy a particular share and only sell when you would require it, is investing.
Remember we have to invest or earn in such a way that we should not lose our capital.
If we do not do the above exercise we do not give ourselves a chance. Give yourself a chance. Go ahead and plan, at least you would be happy that you tried and you would get a better idea as to your chances.
Monday, October 27, 2008
Saturday, October 25, 2008
Financial Planning
With Financial markets in doldrums, I think this is the best time to do your financial planning. What needs to be done?
First find out your financial situation. Make a list of all your investments, your insurance policies, your loans or financial commitments.
Now that you know what your current financial situation is, make a list of your goals and objectives in life. You need to be specific, at what age what would you like to have or what commitments you might expect. You should be able to measure the same in terms of amount of money, its OK if you measure using today’s rates. Ensure that the goals are realistic and attainable.
Now that we have the goals, let’s make a list of unexpected problems. Basically we need to do a what-if analysis. This is required to counter any untoward incident, which could hamper or be a clog in the wheel to achieve the goals. There are no solutions if there are no problems.
We have most of the things in place, using the data gathered, prepare a plan.
Now follow the plan.
Do a periodic review, basically do all the steps given above, suggested review once a year.
What does the plan usually contain, it usually will tell you invest, invest and invest. So now you understand why I started with this is the best time to financial planning. This is the most pessimistic scenario. Markets are down, there is also a fear of recession or should I say we are already in recession. But the prices are still high (except stock prices).
So this is the best time to make the most. What is your take? How long will the markets take to return to normal? Most of the economists say max 2 years and then they will bounce back. You will never get such good valuations. Don’t try to time the market. Make your plan and follow it. I’m sure your goals are long term, by which I mean more than 5 years. In that time you would definitely benefit.
So what are you waiting for? Take a paper and pen and start. Let me assure you once you start, it won’t take much time to write. It will take a long time to gather data. So better start and if you are lucky you might just time the market.
All the best.
First find out your financial situation. Make a list of all your investments, your insurance policies, your loans or financial commitments.
Now that you know what your current financial situation is, make a list of your goals and objectives in life. You need to be specific, at what age what would you like to have or what commitments you might expect. You should be able to measure the same in terms of amount of money, its OK if you measure using today’s rates. Ensure that the goals are realistic and attainable.
Now that we have the goals, let’s make a list of unexpected problems. Basically we need to do a what-if analysis. This is required to counter any untoward incident, which could hamper or be a clog in the wheel to achieve the goals. There are no solutions if there are no problems.
We have most of the things in place, using the data gathered, prepare a plan.
Now follow the plan.
Do a periodic review, basically do all the steps given above, suggested review once a year.
What does the plan usually contain, it usually will tell you invest, invest and invest. So now you understand why I started with this is the best time to financial planning. This is the most pessimistic scenario. Markets are down, there is also a fear of recession or should I say we are already in recession. But the prices are still high (except stock prices).
So this is the best time to make the most. What is your take? How long will the markets take to return to normal? Most of the economists say max 2 years and then they will bounce back. You will never get such good valuations. Don’t try to time the market. Make your plan and follow it. I’m sure your goals are long term, by which I mean more than 5 years. In that time you would definitely benefit.
So what are you waiting for? Take a paper and pen and start. Let me assure you once you start, it won’t take much time to write. It will take a long time to gather data. So better start and if you are lucky you might just time the market.
All the best.
Monday, October 6, 2008
Inflation
Hi Everyone,
I actually got bored writing, also did not know what to write on. While sitting over a drink with some of my friends, I mentioned that I have started writing my own blog. I explained that I would be writing on some finance topics. And when it comes to finance everyone wants to know more. This is where the money is. Then one of them started asking what Inflation is. That is when I thought this is a good topic to write on.
We keep reading everyday that inflation is gone up, it has reached 12.65% etc. So one of them mentioned that for me everything is the same. Even when inflation was down prices were going up, so how does this 12.65% make a difference and how is it affecting our lives, or should we say prices.
Let’s check what Wikipedia says about Inflation. As per Wikipedia, in economics, inflation or price inflation refers to a general rise in the level of prices of goods and services over a period of time. That means it is nothing but a comparison of prices from one period with another. So this brings us to another conclusion, if the price rises there is inflation.
If there is a rise in prices there is inflation. With our income remaining constant, if the prices go up, it affects our saving potential or our life style. So the value of our money is gone done. What I mean is Rs.10 will be Rs.10 but what I can get in Rs.10 will be less i.e. the real value of money has reduced or our purchasing power has reduced.
So what happens when Inflation goes up? As explained earlier our savings potential is reduced. This affects investments, since we invest our savings. And those with money or in business might go into the mode of hoarding, to generate more income. Because the cost of production or purchase also goes up. If there is less stock in the market, the prices will rise.
When we say comparison of prices, the question is prices of which items. Usually the prices of a number of items of common use as a basket are compared. A series is made of all these items on a weekly basis and this series is compared to find out if the price is going up or down.
Usually the series that is used is Consumer price Index. Consumer Price Index typically contains items which are generally used by normal consumers. In India the Consumer Price Index is calculated by the Central Statistical Organisation. They first collect the average prices by cities and then tabulate the all India figures.
The main Categories
1) Food, beverages, tobacco
2) Fuel and light
3) Housing
4) Cloth., bedding and footwear
5) Miscellaneous
To Conclude, as my friend had mentioned earlier prices were always rising, then why the noise now. The reason is simple, earlier the rate of rise was small, not it has gone up. Prices are going up rapidly or at a higher rate.
I actually got bored writing, also did not know what to write on. While sitting over a drink with some of my friends, I mentioned that I have started writing my own blog. I explained that I would be writing on some finance topics. And when it comes to finance everyone wants to know more. This is where the money is. Then one of them started asking what Inflation is. That is when I thought this is a good topic to write on.
We keep reading everyday that inflation is gone up, it has reached 12.65% etc. So one of them mentioned that for me everything is the same. Even when inflation was down prices were going up, so how does this 12.65% make a difference and how is it affecting our lives, or should we say prices.
Let’s check what Wikipedia says about Inflation. As per Wikipedia, in economics, inflation or price inflation refers to a general rise in the level of prices of goods and services over a period of time. That means it is nothing but a comparison of prices from one period with another. So this brings us to another conclusion, if the price rises there is inflation.
If there is a rise in prices there is inflation. With our income remaining constant, if the prices go up, it affects our saving potential or our life style. So the value of our money is gone done. What I mean is Rs.10 will be Rs.10 but what I can get in Rs.10 will be less i.e. the real value of money has reduced or our purchasing power has reduced.
So what happens when Inflation goes up? As explained earlier our savings potential is reduced. This affects investments, since we invest our savings. And those with money or in business might go into the mode of hoarding, to generate more income. Because the cost of production or purchase also goes up. If there is less stock in the market, the prices will rise.
When we say comparison of prices, the question is prices of which items. Usually the prices of a number of items of common use as a basket are compared. A series is made of all these items on a weekly basis and this series is compared to find out if the price is going up or down.
Usually the series that is used is Consumer price Index. Consumer Price Index typically contains items which are generally used by normal consumers. In India the Consumer Price Index is calculated by the Central Statistical Organisation. They first collect the average prices by cities and then tabulate the all India figures.
The main Categories
1) Food, beverages, tobacco
2) Fuel and light
3) Housing
4) Cloth., bedding and footwear
5) Miscellaneous
To Conclude, as my friend had mentioned earlier prices were always rising, then why the noise now. The reason is simple, earlier the rate of rise was small, not it has gone up. Prices are going up rapidly or at a higher rate.
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