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It is always better to do things ahead of time rather than doing it at the eleventh hour. This is true for your finances as well. An ideal way to investing is creating a financial plan and understanding your financial objectives and other parameters. Financial planning might seem complicated to novice investors, but it is fairly simply to be honest. In this article we will focus on several things that you as an investor must keep in mind before you create a financial plan.
- Perks of starting soon
Investing early has several benefits that must not be ignored. One of the primary one being the power of compounding. Compounding helps to amplify the returns on investments at an exponential rate. It is directly proportional to the investment horizon – meaning, the longer you stay invested, the higher would be the returns from compounding which is a brilliant way to achieve your financial goals quickly.
- Emergency fund – is it needed?
Several investors skip the step of creating an emergency corpus for themselves and instead invest that money towards their other financial goals. This could be quite detrimental to one’s investment portfolio. This is because emergencies do not come knocking at one’s door – they always come unannounced. So it is a good idea to be prepared for such scenarios so that you do not dig into your investments. Consider allotting around three to six months of your living expenses towards emergency corpus. Liquid funds are an amazing investment option to park your emergency fund.
- Using tax benefits
Several investors often fail to exploit the tax benefits offered to them and end up paying a huge sum of money as tax. There are certain tax benefits available to investors. One of them being tax deduction under Section 80C of up to Rs 1.5 lacs per annum. Basically, an investor can save up to Rs 46,800 by investing in tax-saving investments provided that they belong to the highest tax slab. Examples of tax-saving investments include ELSS tax saving mutual funds, SCSS (senior citizens savings scheme), NPS (national pension scheme), tax-saving FD (fixed deposit), PPF (public provident fund), etc. Though, it is a good idea to invest in tax-saving investments to lower your tax outgo, you must not invest in tax-saving investment options for the sole purpose of saving tax.
- Go debt-free
It is always a good idea to be completely debt-free to be financially independent. What’s more, debts such as personal loans and credit card debts usually charge high interest rates to investors which can consume a huge part of your income. You can begin by getting rid of high-income rate debts, and then gradually moving your way down to be entirely debt-free.
- Review your portfolio
Several investors have this notion that their job as an investor ends at merely choosing and investing in the right investment options suitable for their investment portfolio. However, that’s not true. Reviewing one’s financial portfolio is as important as well investing. This would help you to understand the performance of your mutual fund schemes and make any changes if required.
These are a few things that you as an investor must keep in mind before planning your finances. You can also use a mutual fund return calculator to help you better plan your finances. Most fund houses and AMCs (asset management company) provide mutual fund calculators to investors to calculate the net expected returns on their mutual fund investments. Happy investing!