Financial planning has now become an important part of our lives as new avenues of expenditure and income are growing parallelly. While we must spend to live a decent life, we also have to focus on avoiding impulsive buying. Financial planning should be started early in career for better result. We earn more when we are young and gradually our capacity to earn decreases. That’s why we need to a financial planning in place to make sure we are having enough means to manage ourselves when we grow old or become jobless. A sufficient corpus may be built only with financial planning.

Financial planning includes managing your cash flow, creating assets that give return & creating good liabilities. Now what are good liabilities? Good liabilities are those which are used to create return giving asset or are mandatory for living a dignified life.

Let us start with cash flow statement to understand value of financial planning. A simple calculation of cash flow will give you an insight of how you are managing your money. Say – Mr Randeep Singh is working for an IT company with net in hand salary of Rs 40000/-. He took a personal loan of Rs 1.50 Lakh for a trip  to northeast India with his friends. He has also used his credit card for shopping clothes, shoes & bought gears for this trip. His cash flow statement goes like this:

Income Expense 
Salary40000Lodging & Food10000
Other Income0Fuel3000
  Personal loan EMI5200
  Credit Card15000
Total 40000Total38200
Net amount1800  

 As we see his choice of going for a trip without keeping finances in mind has crippled his monthly budget and he is left with just over 4% of his monthly salary to live with for entire month. He is also not making any investment as he has no money left after expenses. The liabilities of Rs 1.65 lakh that he created were totally avoidable and are called bad liabilities. His money outgo increased by Rs 20200 which amounts to a whopping 50% of his salary. Even in this case, Mr. Randeep will not feel any cash crunch as he will have some leftover amount from PL to use. At this junction, he needs to understand that he is taking bad financial decision which may be disastrous for him if he continues to spend recklessly like this.  He needs a financial planner, who will recommend him to invest first and spend later.

 At the same time, his friend, Mr Viaan Kumar did not join him for the trip as his financial planner had advised him against creating any bad liabilities. Since Mr Viaan is giving due importance to money-saving & building wealth, his cash flow looks like this:

Salary40000Lodging & Food10000
Other Income0Fuel3000
  Personal loan EMINIL
  Credit CardNIL
Net amount9000  

 He has invested 40% of his salary in SIP and Rs 9000/- is kept in his savings account for emergency uses. In a matter of just one year, he will have Rs 1.00 Lakh in the savings account. His planner also advised him to get a term & health plan early in life to save on cost and secure himself from any eventuality. His SIP of Rs 16,000 with an increase of Rs 1000 every year for a period of 10 years at an annual return of just 12%, will bring him a sum of Rs 45.00 Lakh. Considering Mr Viaan started to work at an age of 25, he will have wealth of around Rs 50.00 Lakh at an age of 35, when most of his colleagues will still be struggling with credit card bills. Mr Viaan is now financially strong with Rs 45.00 Lakh in investment, Rs 5.00 Lakh in savings & cheap term & health policies.

The only reason that separated Mr Viaan Kumar from his friends is his financial planner and his determination for financial freedom..


Author: Admin

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