Basics of financial planning
We earn, spend, and most of us invest too, but do you have a clear picture about your finances? Do you ask yourself why you have chosen a particular investment, what you should expect from it, and how it will help you reach your financial goals? Do you, in effect, have a plan? A majority of people are likely to answer 'no' to this question. We tell you the basics of financial planning and how to achieve it.
What is financial planning?
We all have certain goals in life and to fulfil these, we need money. Whether it is your child's education and marriage, buying a house or preparing for a comfortable retired life, having a clear financial plan makes it easier to achieve these objectives. Even if you believe that you have the resources to reach your goals, financial planning can help you use these optimally. It will ensure that the right amount of money is available at the appropriate time in the future.
Risks & rewards
Financial planning involves systematic and disciplined investments that can help create wealth over time. The most crucial aspect is to choose the instruments that can work for you and help achieve your goals. When you invest in a financial tool, you must keep in mind that its potential return will be a factor of the risk that you are willing to take with your money.
The lower the risk, the lower will be the returns that you can expect. High risk, on the other hand, is associated with high potential returns. It does not guarantee extremely good returns, just the possibility of higher ones. More risk could also lead to greater potential losses. Take stocks.
While these have the ability to deliver double-digit returns in the long run, they also carry the risk of negative returns. Similarly, gold may do well when the outlook on the other asset classes is unclear, but it may remain flat if the economy is doing well. Real estate investments, on the other hand, promise both rental income as well as price appreciation, but selling a property in a hurry is almost impossible.
Source: Economic Times
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