FINANCE SPECIAL...5 Steps to lay a solid financial foundation

5 Steps to lay a solid financial foundation 

These simple measures will ensure that you achieve your goals without a hitch

    Strong structures need stronger foundations. Unfortunately most of us overlook this simple, yet crucial, fact while planning our financial future. It is imperative to optimise one’s resources and lay a secure foundation, which can help achieve one’s financial goals and dreams. The importance of a proactive approach has been accentuated in the current economic crisis. Here are the basic steps that can help you create a firm financial base. 1
Define your dreams
The first step is to clearly define your goals because you can reach your destination only if you know what it is. Though we all have dreams, we rarely put them down on paper. Even if some of us do, very few translate these into specific numbers. Defining a goal is essential as it has a direct impact on deciding the route you choose to achieve it. For instance, if your objective is to save for a car a year later, you will need to be more conservative in your approach due to paucity of time. However, if you’re planning for your retirement, which is 25 years away, you can afford to invest in asset classes like equity. 2
Chart an asset allocation strategy
A carefully chosen asset allocation strategy, aligned with the financial planning process, is the key to taking you closer to setting up a sound financial base. By dividing your investible surplus among asset classes that do not respond to the market forces in a similar manner, you may be able to minimise the effects of volatility while maximising your chances of good returns in the long term.
    While determining the asset allocation strategy, another essential element people often overlook is risk appetite. While some may see it as an opportunity to make money by investing in high-risk asset classes, others may perceive it as a danger of losing money. For instance, you may have parked your funds in an exotic investment product lured by attractive terms that are visible upfront. However, you may not have fully understood the implications of investing in such an instrument. Ensure you invest in products that match your risk profile and dig deeper to understand the possible risks that you may be taking.
    Lastly, while deciding on the route to reach your goals, time horizon needs to be taken into consideration. This implies that the sooner you need your money, the wiser it is to keep it in investments that have a comparatively higher liquidity. For instance, if you need to write a cheque next week and are banking on money tied up in real estate, it is not an appropriate investment for achieving the
required result. 3
Invest in a disciplined manner
Disciplined investing is the key to long-term financial success, but it’s also one of the most complex and difficult cornerstones, especially when the financial markets are extremely volatile, as has been the case of late. Keeping your investments on track for the long haul involves disciplined and regular investing, along with diversification.

• Start early
Long-term compounding can help your nest egg grow due to the ‘rolling snowball’ effect. Simply put, compounding adds to your earnings on your reinvested earnings. The longer you leave your money to work, the more exciting the numbers get. The point is to start investing when you are young instead of waiting till you have a sizeable sum to invest.

• Stay disciplined
Having a comprehensive strategy for investing is critical, but equally important is sticking to it in the long run, even when the markets are in a flux and causing emotional mayhem as investing is often a tug of war between the head and the heart.

• Rupee-cost averaging
This strategy involves consistently allocating a set amount towards
    investments with a regular schedule (weekly, monthly, quarterly), regardless of the market’s short-term performance. Over time, this may lower your average cost per share, which could help smoothen out the effects of market volatility. 4
Make sure you are covered
While market and economic fluctuations can impact one’s financial 5
Track, review and re-evaluate
Last, but not the least, track your finances regularly. This is essential to evaluate if you are getting closer to your financial goals or not. This exercise will give you the reasons for deviation and allow you to take timely action to rectify the same. Besides, changes in family or money market may warrant a change, which needs to be reflected in your overall financial strategy.
    This five step approach can help you chart out your financial journey and take prudent decisions rather than tackling financial crisis at the last moment and leaving things to fate. Remember, the journey to wealth creation is a long one, but if you choose your path carefully, your destination can be much closer than you think it is. stability, various changes in family, career and health also affect your long-term goals. This makes a solid protection plan an important part of the financial foundation. Unpleasant surprises can unravel years of careful savings in a short time. Most people have serious gaps in their coverage or don’t have protection to address key risks. Here are a few tips to help ensure sound protection.
Life insurance
It’s crucial to have life insurance to provide continuous monetary support to your family or dependants to maintain their lifestyle if you die suddenly. So, take advantage of the most appropriate life cover.
Protection plans
Protection plans have been perceived to be synonymous with life insurance, but there are many other things that you must protect to keep your financial situation stable. Some such policies are for:

• Permanent disability: This is to protect you from the impact of any sudden injury or illness, which may prevent you or your spouse from working and could derail your lifestyle as well as plans for the future.

• Householder: Considering the monetary and emotional importance of this asset, it is surprising to see that many people don’t have a householder’s policy, which covers a house against fire, burglary and other such common risks.

• Health: Having a sufficient health cover is an absolute necessity in the wake of rising healthcare costs. Most individuals have a medical cover only through their employers, which is often inadequate.

• Auto: Typically, we look at motor policies merely from a compliance perspective and don’t pay attention to it while choosing one. Ensure that it covers aspects like cashless facilities across a large number of motor garages, warranty on repairs, etc.

Kapil Narang. ET120903