Whether you’re trying to save up for a new car, buy a new house or even amass a corpus for retirement, financial planning is the way to make it happen. While your financial plan is designed to cater to your individuality as an investor, there are some fundamental rules that everyone should know. So to help you strengthen your foundations, here are the 6 golden rules of financial planning:

• Start saving earlier in your career

When it comes to financial planning, the earlier you start, the better. It is only then that you can utilize the full power of compounding. For example, if you start investing INR 5000 per month at 8% per annum when you are 25, then by the time of you retire at 60, your corpus will have approximately INR 40 lakhs more than if you had started the same when you are 30. 

• An emergency fund is a must

Accidents and medical emergencies are unpredictable events, but usually require immediate attention. Maintaining an emergency fund will ensure that neither your cash flow is deterred, nor are your investments and goals affected in the event of any contingency. Here it is recommended that you set aside an amount of around 3-6 times your monthly expenses, primarily composed of liquid funds. 

• Review your investments over time

There should be a component included in your financial plan to review your asset allocation strategies against your risk profile at different intervals. This will enable you to find the right diversity of investments in equity and other assets like bonds, mutual funds, annuities, property, etc. over time. Here it is good to remember that your propensity to take risk is likely to decrease as you get older, when there are other people who are dependent on you. 

• Procure the right quanta of insurance

Just as important as reviewing your investments is the need to procure the right quanta of insurance to protect them and secure the well being of you and your family. While the exact types of insurance policies your purchase may vary based on your needs, you should never avoid it altogether. In this sense, you must have at least basic coverage of health, home and vehicle insurance. Apart from this, you should definitely purchase a life insurance policy if you are the sole breadwinner in the household.

• Never forget about taxes

It is often repeated that nothing in this world is certain apart from death and taxes. Heeding this advice, you should never avoid paying your taxes – whatever the reason – as it could affect your goals detrimentally in the future. Then, because tax is inevitable, you should have knowledge of the deductions that may apply to you particularly, so that you can optimise the tax efficiency of your financial plan. 

• Retirement planning at different stages of your life

It is a common misconception that your Public Provident Fund (PPF) contributions will solely see you through a comfortable retirement. A comprehensive retirement plan is multifaceted, and shifts focus based on the period of life you occupy. In this sense, your retirement plan should also include investments in equity and other similar assets particularly in your 20s and early 30s – when you can take more risks. As you grow older, you should think about making contributions towards the National Pension Scheme (NPS) or another annuity. This keeps your savings secured, with assured returns for when you decide to retire.

Remembering these points will prove to be key when you are in the process of financial planning. Another important thing to remember is the need to seek professional advice. Financial advisory services have become relatively affordable and hence increasingly accessible in today’s world. In line with this, working with a professional is a good way to make sure that you don’t commit any costly errors while developing or executing your financial plan. However, it is important that you consult a certified financial planner or wealth management firm that you are comfortable working with.