Financial Planning – A beginners guide to plan your finances

While there is a whole lot of information on the how and the why of financial planning, it can get overwhelming to grasp the essence or understand concepts like budgeting, stocks, assets, debt management, retirement planning and so on and so forth; especially when these words or concepts are more or less alien to the average salaried individual.

The goal of this beginners guide, hence, is to explain in the most easy-to-understand manner, and focus on the important stuff like what is financial planning, why plan, financial goals, portfolio etc and understand how they work together to lay the groundwork for achieving different financial goals.


What is financial planning ?

What are financial goals ?

Where are you now ?

Planning towards achieving goals

Building your portfolio to achieve goals

Retirement Planning

Goal-based Investment Planning

Managing Debt

Planning your taxes

Tools for Financial Planning


What is financial planning ?

What Is Financial Planning?

In the simplest sense, “Financial Planning” is an ongoing process that allows an individual to make measured and sensible decisions about his or her finances; which further help them achieve strategic objectives and future goals. It involves curating a plan along with the help of an expert, for effective management of one’s incoming and outgoing monetary data. A “financial plan” is a comprehensive statement that evaluates a person’s present finances and estimates future financial state by using existing variables to draw out a best-suited strategy.

Why Plan Your Finances?

So why do we need to have a financial plan? The above-mentioned definition might give the impression that financial planning is only for the rich and wealthy. But in reality, you don’t need to be rich to chart out a good financial plan. On the contrary, chances are if you do plan financially, you’ll likely be richer than you were when you started off. So, whether you are a college student on a monthly allowance, or a salaried individual, or even a home-maker with some few assets tucked away – you need financial planning!

Still not convinced? Here are 10 reasons why everyone needs to plan their finances.

Managing Income: Financial planning helps you manage your income effectively and helps you understand how much money you will require to take care of your expenditure while also end up saving some.

Better cash flow: When you undertake financial planning, you are carefully monitoring your spending pattern and reducing expenses. This in turn helps to increase cash flow as expenses are limited and planned.

Capital: More cash in hand means more capital. Financial planning can pave the way for you to broaden your investments and improve finances.

Investments: A financial plan not only takes care of an individual’s financial objectives, but also helps to avoid unforeseen monetary losses by planning risk tolerance. Your financial advisor will consider your personal circumstances and guide you as to what would be the right type of investment options for your financial needs and goals.

Family Security: Financial planning helps you to provide your family with proper insurance covers and the right policies, giving you a sense of security and peace of mind that your loved ones and you will be taken care of in the case of any mishap.

Increased Standard of Living: Good planning results in better savings, larger investments and increased cash flow, which further improves the way you lead your life by giving you access to better quality of services that you need.

Valuable knowledge: Responsible saving-spending habits, measured goals, effective planning, calculated decisions and regularly reviewed results will help you to gain a far better understanding of your financial situation. This valued knowledge can put your budgeting and planning in perspective and improve control on your overall lifestyle.

Assets: Good financial planning allows for selecting the right type of assets for your portfolio. Not all assets are ideal for everyone, and some even come with a set of liabilities attached. Understanding your financial needs in conjunction with your current situation will help you select assets that don’t become a burden overtime. You’ll learn about concepts like settling liabilities and determining the true value of your assets etc.

Emergency savings: They don’t call it ‘saving for a rainy day’ for no reason. Sudden financial roadblocks may arrive to throw you off your chair. Financial planning will equip you to have investments and savings with a relatively high liquidity. So that you can use the same during emergency or in times of need for instance; intensive health care or higher education or moving to another country.

Continuous/ongoing assistance: A good financial advisor is key to healthy financial planning. What’s even more important is to build a relationship of trust with your advisor and help him/her, help you when you need expert advice in any sticky situation.

Key takeaways

✔ “Financial Planning” is an ongoing process that allows an individual to make measured and sensible decisions about his or her finances.

✔ Financial planning helps you manage your income effectively.

✔ It helps to broaden your income, and avoid risks.

✔ It grants you family security, peace of mind and an increased standard of living among other benefits.


What are financial goals ?

Money matters are never a one-size-fits-all type of deal. Every person has different capabilities, objectives and priorities with regards to his or her finances. If proper care is not taken to plan one’s finances, one stands at the risk of reaching a point where we’re wondering “where did all the money go?”

If you’ve asked yourself that question at least once or perhaps more than once, you probably need to revisit your financial goals. We all have certain financial goals, they are the objectives, or targets that we set for ourselves with regards to how we want to spend our money and where; and also, what we want to do with our savings.

In short, “financial goals are the big-picture objectives of a person or organization that are expressed in monetary terms, often driven by one’s future financial needs”.

How To Set Financial Goals

Setting smart financial goals both short-term, and long-term is key to making your future financially secure. Not only does it put you in charge of your money and hence your future life, it also gives you a better perspective on how best to manage your expenses in order to achieve your set goals well ahead of time. Without any goals, you are likely to go overboard with your budget, so to avoid coming up short of money when you could really use it, the first step is setting realistic goals according to your financial state.

Use the following expert recommended tips to set your personal financial goals and begin your financial planning journey on a firm footing.

1. Start with near-term goals first

Right of the bat, setting long-term goals that are relying on a larger scale of savings can make you intimidated. So, start small. Chart out your short-term easy-to-achieve objectives based on your priorities and figure out the best strategy to meet them with your finance manager. This will give you the boost of confidence that you need to move on to the more substantial ones as you are now well equipped with the foundation knowledge.

You might want to read: How to plan your wedding finance like a pro

2. Make a budget to track your spending better

There are hordes of online tools and mobile applications that let you establish free budgeting programs. Your budget should include all information about your incoming and outgoing monetary transactions, from all of your accounts. There are certain tools and applications that let you label your expenses into categories and determine where you need to cut back. Without a budgeting program in place, it can be pretty confusing to figure out where your money is going and how can you reverse it. For instance, when you make a budget and keep it updated every day, at the end of the month you might recognize that your daily weeknight dinner with your colleagues is costing you way more than what you imagined.

Add to that your weekend spending or shopping spree with your family and you can really figure out the cracks in your plan. Once you have recognized the way you are spending, you can make better decisions about how to manage your expenses in the future.

3. Keep an emergency fund

Start setting aside some money in an emergency fund. It could be in a separate account or even a piggy bank if you’re a student. Start with a realistic amount that you can safely tuck away without feeling too much of a pinch every month and slowly build up as you get used to spending lesser and lesser. Emergency funds are highly useful in times of need; for e.g. unemployment, debts etc.

Key takeaways

✔ Every person has different capabilities, objectives and priorities with regards to his or her finances.

✔ “Financial goals are the big-picture objectives expressed in monetary terms, often driven by one’s future financial needs”.

✔ Starting small is key, when setting financial goals. Once you meet your short-term goals, you can move on to the bigger ones.

✔ Keeping an emergency fund and a strict budget to follow helps avoid unnecessary expenditure and increases savings for a “rainy day”.


Where are you now ?

Setting goals and planning your finances will give you an upper hand on your spending pattern, and you will get an opportunity to regularly review your goals, track your progress and make any changes as required. But all this won’t be possible without knowing where you stand currently. Understanding your current financial position will help your financial adviser decide what the next step should be to potentially reach your end goals faster.

Once you have set your short-term, mid-term as well as long term goals, you will be able to gauge where you stand in your journey to financial security. These days there are many software options available to download, which let you upload your financial data on the software and give you an idea of where you stand; or you could take help from an expert to figure out your status quo.

Once you know your financial position and your specific goals, you can start working towards meeting your goals based on the priority level. For instance, assume that your list of goals looks like this:

  • Studying abroad
  • Marriage/Starting a family
  • Children’s education
  • Buying a vehicle
  • Down payment for new house
  • Retirement fund

For getting closer to each of the goals, you need to start saving an amount towards each of them by committing to a number that you can discuss beforehand. You could start by aiming to save 10 lakhs for your studies or marriage, maybe 15 lakhs for children’s health and education, and 25 lakhs aimed savings for the down payment of your house, based on your priority. Once you have stipulated an amount of savings for each goal, you will have to really commit to setting aside some amount every now and then towards these causes.

How to calculate your net worth?

It’s extremely easy to get excited about the future when you have charted down a financial plan and are taking the first baby steps towards goal achievement. One might look at all the assets and investments that one owns and feel good about the substantial total amount that it adds up to. However, in order to really know what or how much you own, you need to consider how much you owe. Calculating your net worth will grant you a headway into taking precautionary measures to avoid unwanted financial stress.

How can we calculate our net worth? All you need to do is subtract your liabilities from your total assets.

Net worth = (Total value of all assets) – (total liabilities)

If the difference shows that your assets are more than your liabilities, then you will have a positive net worth. In an ideal scenario, as you keep on earning and saving you net worth should keep growing but taking into consideration that your liabilities are also not constant, net worth should be calculated many times in a financial year.

Calculating your net worth is very simple mathematics. You can start by listing out all of your assets & liabilities like so:

Total assets:

  • Money in bank account
  • Value of investments, mutual funds, insurance policies etc
  • Value of personal vehicle
  • Current market value of your house
  • Personal property like gold jewelry, prized artifacts, vintage furniture etc,
  • Cash in hand if any

Total Liabilities:

  • Mortgage
  • Car loan
  • Credit card debt
  • Personal loan / Student loan
  • Medical expenses in case of a big illness
  • Business capital requirements

Once you have the value in rupees of all that you own and all that you owe, subtract your liabilities from your assets and the remainder will be your personal financial net worth.

In general, the value of assets of a company or an investor is the sum of all the current and non-current assets that are listed on a balance sheet.

Common records include cash accounts, antique items of value, inventory, prepaid accounts and expenses, fixed assets, property plant and equipment (also known as PP&E), intangible assets, goodwill, intellectual property and accounts receivable etc.

Similarly, the value of liabilities is measured as the sum of all current and non-current (past or predictable) liabilities that are shown in the balance sheet for e.g. Credit card, accounts payable, short-term and long-term debt, fall in revenue of investments or value of goods owned, depreciation, capital leases, fixed financial commitment, taxes etc.

Understanding Your Income And Expenses
Managing money doesn’t have to be stressful if you gain proper understanding of your income and expenditure. Depending on your personal situation, keeping a regularly updated account of all your expenses next to your incoming cash flow, will guarantee financial health and allow a fair understanding of your net earnings and savings.

Beginners in financial planning usually feel overwhelmed when it comes to book keeping and accounts. Bookkeeping doesn’t have to be treated as a chore, rather it needs to be considered an effective tool that provides an opportunity to measure fiscal deficit and/or surplus.

The traditional way to track your accounts is manually summarizing your data in spreadsheets, but this is easier when you have relatively small numbers.

However, when you have a larger data to process, a good idea is to us a professional bookkeeping software that does the dual job of tallying your financial data as well as making reports that highlight important aspects. Using such software also eliminates the risk of human error and provides reliable results.

It’s better to set aside some time for understanding your income and expenses because unless you have the whole summarized spreadsheet in front of you, you cannot control your cash flow and budget. You can start by categorizing your expenses under various labels based on your type of expenses, for instance you can label your spending as either necessary, urgent, luxury, or avoidable, unavoidable, fixed, varied, etc.

Once you have established an inventory of sorts, you can easily gauge your most urgent needs and address them in that order. Doing so will make it convenient to transform your abstract needs into physical ones, thus allowing you to decide its priority level, what it’s worth and how to address it.

Key takeaways

✔ After setting your goals and prioritizing them, you need to start planning how you will achieve each and every goal.

✔ Start with short-term goals and maintain a log of how close you are to achieving it. It helps to motivate you.

✔ Manage your money, plan your investments accordingly and stay aware of your unwanted spending.

✔ Make a separate plan for each goal and save some money towards each goal every month.


Planning towards achieving your goals

Once you have formed a hierarchy of your goals and objectives, it becomes very easy to decide which ones you want to address first. Prioritizing your short-term and long-term goals is key towards smooth transition towards financial freedom.

So how must we plan to achieve our goals. The first and most important step is realizing and accepting that our needs differ from our wants. You have a limited number of resources, but your wants can be unlimited. The following tips can prove handy while planning to achieve your financial goals.

Managing money is the essence of financial planning, and avoiding or controlling unnecessary expenses is at the heart of any good financial strategy.

Another smart move is to be aware of what you are spending on. Often, we tend to be impulsive in our expenses and don’t realise that what we believe to be an asset can quickly turn into a liability. Accumulating things that do not increase in value over time can lead to money-blocking.

Determine which of your investments you actually are making the most profit on and which of them you can afford to lose. Don’t think of giving up an asset as a loss, since the time and effort that you now have can be devoted towards another priority thus taking you one-step closer to your goal.
Start early. You don’t have to be over 35 with a work experience in double digits to start investing. If financial security is your goal, it’s better to start investing early.
You already have your goals categorized; the next step is to decide where you want to invest. If you are a risk taker, you may put your money in a diversified equity fund (more information below) for example, whereas if you wish to avoid risk, you could go for a balanced (safe) investment. These days mutual fund investments are a versatile investment option, jump to Chapter 5 to know more about mutual funds.

Further reading: How to manage money as a parent in 2020

Key takeaways

✔ After goal setting, and before starting to work towards their achievement, it is important know where you stand.

✔ Understand your income and expenses from a financial viewpoint and restrict your expenses to include the necessities and avoid the luxuries as much as you can to enjoy them later.

✔ Calculate your net worth using the tips given in the chapter and chart out your assets and liabilities.

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Building Your Portfolio To Achieve Your Goals

In today’s day and age, going by the current state of the financial marketplace, a well-maintained financial portfolio is critical to predict an investor’s success. Any investor who wishes to achieve goal fulfillment and increase risk tolerance needs to ensure that their portfolio meets their future capital requirements. Building your financial portfolio that follows a systematic approach to align with your investment strategies is key to consistent growth of your long-term investments.

Here’s how you can construct your own portfolio.

Asset Allocation

The first step towards anything is ascertaining the situation. You need to determine your individual financial footing and re-evaluate your goals. Also consider key aspects like your age, your income and assets, number of years within which you want to achieve your goals, amount of capital you possess, future needs etc; and depending upon these factors you can devise your strategy. A college student who has many years to invest, plan and achieve goals will require a different strategy than a middle or close-to-middle aged person with a large family who wishes to fulfill his family’s goals and retire.

Also consider your personal preferences, what is your risk-tolerance level? Would you be willing to jeopardize the potential loss of some finances for the possibility of gaining much more? There is a principle called ‘risk/return trade-off’ in finance, which means the greater the risk for potential losses, the higher is the possibility of returns. Instead of totally eliminating risks, you can instead optimize it for your individual needs and lifestyle.

However, if the dip in your investments is taking a toll on your mental health, then it’s probably not a good idea for you to invest somewhere, which makes you lose sleep. It all differs from person to person – a young person beginning his or her career can afford to take greater risks especially if they are not dependent on their current investments, but a soon-to-retire investor must focus on protecting the present investments and making the most out of them. Once you have understood your personal needs, preferences and determined your risk-tolerance in stressful situations, you can now begin to define how you want to allocate or classify your assets in various categories. This is called asset allocation.

Further reading: 20 most common money mistakes people make

Diversify your asset allocation

After successful asset allocation, you need to further divide your capital into corresponding classes and sub-classes. Examples of common classes for asset allocation are equity, debt and cash, but it doesn’t do well to put all your money in one class, say for instance equity. Maintaining a delicate balance is what helps counteract inflation and brings about financial freedom. So, a smart investor would divide the sum of his capital into sub-classes and invest in a diversified manner as per his/her goals.

Even if you invest a good sum in equity (since it is a safe and tax-efficient entity), you could potentially sub-divide your portfolio’s equity section by putting them under different industry sectors, or if you invest in stocks, you can categorize them into domestic and international sub-classes. This not only gives you a better categorized portfolio, but also has the potential for greater returns as each class and subclass has a different level of risk/return trade-off.

Reassess your portfolio

Building a strong financial portfolio doesn’t end at allocation and diversification simply. Since market changes and price alterations are quite unpredictable, you must revisit and reassess your portfolio regularly to determine whether there is any need to make significant changes in your weightings. Moreover, your own financial situation is bound to change, your future needs may change, your goals may need revisiting or perhaps your risk-tolerance level improves, in all these scenarios your portfolio needs to be assessed and adjusted as per the requirement.

Re-balancing your portfolio

Based on your assessment or reassessment of your financial portfolio, you may need to tweak things a little, or a lot, to remain steady in achieving your future goals. For instance, if your risk-tolerance has increased, you might wish to allocate some more assets in riskier classes like small-cap stocks. On the other hand, if it has dropped further then you may need to re-adjust accordingly. This helps you decide which of your investments have become overweight and which are under-weighted. Next, you need to strategically plan as to how much of your overweight investments need to be lost and replaced by under-weighted securities.

The entire activity of building your portfolio is based on diversifying and re-balancing your securities. Simply having some investments in different classes isn’t enough, it helps to spread out the investments further and across different sectors. The resulting portfolio is considerably risk-free with a high potential of gaining economies of scale.

Most Common Financial Investment Options

There are many things you can invest in which act as agents that investors use to build their personal financial portfolio, like Mutual Funds, Equity/Stock, Insurance Covers, Banking accounts, Fixed and Liquid assets and many more. Let’s look at some of them in brief.

1. Mutual Funds

Mutual funds are a great way to start your investment journey as they are easy & non-stressful. A mutual fund is a pool of money that is collected from thousands of individual investors and the sum is used to be invested into the securities market. A fund manager is hired to manage the portfolio of the investment and he or she tries to earn the highest returns possible.

There are 3 types of Mutual Funds – Equity funds, Debt funds, and Hybrid funds.

Equity mutual funds are those that invest in equity stocks with an aim to generate higher returns over a long investment period. These types of funds are suitable for long-term investment of 5 years or more. It should be noted that equity mutual funds can fluctuate considerably in a short time period.

Debt funds or fixed income funds, as the name suggests, invest in fixed income securities like bonds, liquid funds, debentures etc. These are relatively low-risk options of investment as they offer steady but far less returns. This makes them a preferred choice for conservative investors with short-term goals who need to safeguard their capital over and above earning returns.

So which type of mutual fund you choose depends on your individual investment needs and future goals.

For instance, a debt fund would be a better choice for short term goals requiring less amount of capital like buying a car or paying off the credit card bills; where as an equity mutual fund can be a great way to save up for your retirement or any other long term goal like buying a house in the next 5-10 years etc.

If you are a first- time investor and you are looking to invest in an equity fund, then the hybrid or balanced fund would be a suitable choice for you. Hybrid or balanced type of funds usually split the money into both equity fund and debt fund ensuring you get the best of both worlds – the stability of debt funds and good returns from equity.

What you need to know before investing in mutual funds

If you want to start investing in mutual funds, there are a few requisites that you must be aware of. First things first, you must have a bank account and KYC compliance. You also need an address proof, an ID proof and passport size photographs, and you must have a PAN number and an Aadhaar number.

Mutual funds are meant to make the task of investing simple and effective, but the actual decision making during selecting the right mutual fund for you, can get overwhelming. There are thousands of mutual funds, and selecting the one best-suited for you can be tricky so, it’s best to get expert help for this important decision. If you still want to do it all yourself, then here are a few pointers to help you get started:

  • Decide which type of fund you want to invest in. This is also a type of asset allocation, where you get to decide how much you want to invest in fixed income securities (debt funds) and how much you prefer to allocate towards equity shares or perhaps you want to divide your capital among both in which case you would go with a balanced fund.
  • Once you have decided your mutual funds asset allocation, you must now select your specific funds that suit your preferences. Whether debt or equity, or hybrid/balanced funds, always opt for those funds that have consistently performed well in the long run. There are many certified and legitimate websites that provide rankings for various mutual funds, to be on the safe side, you must go with a fund that has the highest ratings.
  • Consider how many funds you want to invest in. This decision has to be made early on, depending on your investment capacity. As a first- time investor, a single fund can also diversify your portfolio across a large number of stocks. Later you can opt to invest in two or three mutual funds of different types to ensure you get adequate diversification and steady returns.
  • There are two different types of investment plans that you can choose to go with. These days, all mutual funds offer a direct plan and an indirect plan. A direct plan is where you invest your money yourself, without the involvement of a broker or agent, so you don’t need to pay any type of commission or fee. This reduces the annual expenses although you will have to do everything on your own, from investing in the funds, tracking the growth, reassessing and re-balancing, switching out the funds so on and so forth. For a beginner in mutual funds investment, it makes more sense to go via a broker or an investment agent who will carry out the daunting tasks on your behalf.
  • Finally, the last step is actually purchasing the fund. This can be done directly from the fund’s website (contact the fund houses and request a form which you can fill in and submit with all your other credentials) or you will require an intermediary (financial advisors, banks, distributors, brokers etc).
  • Think about how much you want to invest and how frequently. You could invest in a lump sum amount or opt for SIP (Systematic Investment Plans). Lump sum investing means investing all the money together at one go, and SIPs allow for investing a particular amount given at fixed intervals or frequency. Simply put, if you have a capital of 5 lakhs which you want to invest, you may invest it altogether at once as a lump sum or you may spread it across 10-month SIP plan and invest in installments of 50,000 each month.

2. Insurance Cover

As an investor, you must realize that all or any type of investments come attached with risks, just like your life and property are subject to risks too. Risks of such nature can lead to a serious loss of income and you may end up in a tight financial spot putting yourself along with your family and other dependents in jeopardy. Luckily, insurance covers are available to make sure you do not end up in such a situation should you be faced with a risk that threatens your health or life.

If investment is the answer to wealth accumulation, insuring is the answer to wealth preservation. Insurances are of many types but we will be discussing the two most common types of insurance – Life insurance and Health insurance.

Life insurance

A life insurance policy is a contract between you (the insurer) and an insurance company, wherein, in exchange for premium payments (installments), the company provides a lump sum amount of money (known as death benefit), to the beneficiaries or dependents of the insurer in case of his/her sudden death.

The primary reason why most investors opt for a life insurance is so that the life insurance claim received at the time of premature death can be utilised for different reasons by their family. The reasons could range from future income loss, to paying off debts/mortgages/loans etc, or medical expenses and even to cover up the costs, expenses and other needs during or after funeral.

Some more reasons why life insurance covers are a good idea:

Apart from debts that you leave behind for your family to take care of, be it credit card balance, car loan, business loan etc, dealing with the loss of a loved one can shake the foundation of your family. If you were the only breadwinner of your dependents, your life insurance claim can make sure your family has enough to resist an impact on their lifestyle as they take their time to cope with your sudden absence.
If your dependents include children who are of school or college going age, your life insurance cover can help pay for their education or other essential monetary needs that they may have. Your spouse could even use the money to pay for their wedding or towards securing a home in case you didn’t already have one of your own, and were renting out.
Some term life insurance policies like permanent or whole life insurance, allow for the insurer to withdraw a certain amount of money should the need arise. So, taking this into consideration, if your retirement funds fall short, you can borrow against your life insurance to supplement your retirement. Be sure to consult your insurance agent before taking any such step.

Life insurance can also act as a means of safeguarding your business in the event of your premature death. You can choose to either insure a key employee upon whom the foundation of your business rests or you could opt for buy-sell agreement to take care of plummeting business.

Most importantly, life insurance policy will give you and your family a peace of mind, knowing that they will be duly taken care of if anything happened to you and you don’t have to worry about their financial future.

Health Insurance

Medical care can be really expensive and if one or more family members requires any, it can burn a hole in your pocket. A health insurance policy will cover the cost of all or part of any medical care that the insurer needs, like; hospitalization, medical bills, lab tests, blood work, doctor’s visits, procedures, maternity care, etc. It helps the insurer to avoid going into debt or bankruptcy due to not being able to afford medical care in times of need.

There are many benefits to insuring yours and your family’s health.

If your insurance company has tie-ups with the hospital at which you are receiving medical care, your health insurance can get you cashless treatments which are a huge relief.

Having a health insurance cover also takes care of your pre and post hospitalization charges depending on the type of policy and insurance plan you have chosen.
Some health insurance companies also cover transportation charges that are needed to get to the hospital e.g. ambulance charge.

Insurance policies may also provide the insurer with free health check-ups and tax exemptions on the premiums paid towards the policy.

3. Equity And Stock

In Finance terms equity and stock are sometimes used interchangeably. Let’s try to understand what they mean.

“Equity” is essentially the ownership of any business or asset that may or may not have other liabilities or debts attached to it. It is the value that is attributable to the owner of shares in a business, company or any other entity.

Equity is categorized into two types – Book Value and Market Value.

The Book value of equity is the measured difference between the value of the assets with the liabilities subtracted from them. And the market value of equity is determined by the current share price times the overall number of total shares (in case of public equities), or the value which is set by investors or professionals.

In accounting, whether in an account statement and/ or balance sheets, Equity is almost always seen listed in the book value form. Your equity will be determined (with the help of a financial planning expert,) by an equation that is commonly used in balance sheets i.e. [assets + liabilities = equity.] But the equation will be reframed as [equity = assets – liabilities.]

On the other hand, in finance typically, equity is expressed in its market value form. The market value of equity is not necessarily the same as its book value, it may be higher or lower. The reason being that account statements usually evaluate the past data to determine the performance, however, financial analysts look forward and try to predict the future performance and value. A good example would be if a company floats it’s shares publicly, the market value of the company will be calculated as the current price of it’s shares multiplied by the total number of shares.

To calculate the correct value of equity, you need to track and list all your owned assets, like capital that you raised and repurchased, share capital, earnings retained, net income, etc.

“Stock” is a security that signifies investment made in a company’s shares and its profits. The stock of an issuing company is all of its shares which are owned by different investors on a fractional basis. By this definition, a single share of the company’s stock, represents fractional or singular ownership of the said company in comparison to its total number of shares.

Companies issue their stocks or shares in order to raise money to invest in their business and help them grow. Individuals looking to invest in the stock market, usually purchase a stock or a number of stocks of issuing companies, hoping that the value of the company (and hence its shares) will increase, bringing them profit.

By owning stock in a company, you become a shareholder in that company and get a share of its profits. Stock prices are prone to a lot of fluctuations, sometimes they change throughout the day, but stockholders hope that over time there will be a considerable increase and will bring positive returns. However, the stock market is subject to ups and downs, and there are risks involved. Sometimes companies lose their stock value and are forced to go out of business. In such a scenario, all its stock owners lose either part or all of their investments in that particular company’s stock.

It is important for beginner investors to keep that in mind and spread their money by diversifying their portfolio across various different stocks. You may choose to purchase different number of stocks of different companies in a particular industry or you could invest in stocks of varied industries for a better taste of trading in the stock market.

For Indian investors looking to buy stocks, public companies sell their shares through a stock market exchanges like NSE (National Stock Exchange of India Limited), Metropolitan Stock Exchange, United Stock exchange etc. The NSE is India’s leading stock market and it has a total market capital of USD 2.27 trillion. Investors can buy and sell their shares and stocks among themselves through stockbrokers. All you need is a brokerage account and KYC compliance. Stockbrokers track the supply and demand of each stock as it has a direct effect on the company’s stock price, it helps to determine which is the best one to invest in.

In finance parlance Stock market and Equity market are synonymous and mostly used interchangeably to mean the same thing. They each refer to Equity interests and securities, held in public companies, denoted as stock shares, and traded in the stock market exchange or direct market.

New investors in Equity and Stock also need to know that there are two kinds of stock: Common Stock and Preferred Stock.

Common stock: As the name suggests Common Stock is the most commonly traded stock in the market and it means the holder, owns a share in the company and has a right to vote and elect board members who will manage the major decision- making tasks of the stock. Aside from this, common stock holders may also earn dividends (depending upon the company). Dividends are payments made to the owner of the stocks on a regular basis which can be variable or fixed. In this case, dividends are not guaranteed but common stock is more likely to yield a higher number of returns in the long run, than any other type of investment. Having said that, there is also a higher risk involved as, if and when, a company does lose its stock value and goes bankrupt or liquidates, the common shareholders will not receive any money until and unless the creditors, debtors, bond holders and preferred stock holders are paid off first. This brings us to the second type of stock.

Preferred Stock: Preferred stock indicates that its owner has a certain degree of ownership in the company but no voting rights. However, unlike common stock holders, owners of preferred stocks of a company are guaranteed a fixed dividend forever. Moreover, upon liquidation of the fund, preferred stock owners are paid off (after debt owners) before Common stock owners.

Common and Preferred stocks are the two broad types of stock in the exchange market, but sometimes, they might be further divided into classes. This is practiced by companies who wish to keep the voting rights within a select group of investors.

4. Savings And Fixed Deposits

As part of your financial planning, you can turn towards your personal bank to help you with your wealth accumulation goals. Financial planning is all about saving money that will come in handy at a later stage and putting away some of your money in banks in a very good way to begin that journey.

Two particular types of accounts can prove to be good agents of wealth accumulation – Savings account and Fixed Deposit account.

A savings account is in which you can accumulate money and encourage the habit of saving on a continuous (often monthly) basis. Salaried individuals who earn a fixed income find that opening a saving bank account encourages them to save and even earn a little bit of interest on their saved amount. A savings account may offer a nominal rate of interest ranging from 4-6 percent which is earned on the money you have kept in your account as savings.

A fixed deposit account on the other hand, requires one to park out their idle funds and block it in the account for a fixed period of time. The rate of interest on fixed deposits is higher than that on savings accounts. You are required to put an amount altogether at once in a fixed deposit account for a fixed period of time (known as maturity period), at the end of which you will be given your principle amount along with the interest that you earned on it.

5. Fixed Assets

Fixed assets are tangible objects like property, land, equipment etc that are purchased with the intention of long-term investment without requiring to convert it into cash. Fixed assets are extremely valuable resources as they hold their value for longer than a year and help support business operations and continued security of the fixed asset holder.

In order to determine your fixed assets, you need to ensure they are clearly shown on the balance sheet of your financial portfolio. Two conditions must be met for that to happen: you must gain value from an asset and you should be able to measure the value of the same, only then your asset will appear on the balance sheet. This means a piece of equipment that generates measurable revenue is considered a fixed asset, however if the equipment is not in use or is outdated and not providing any returns then it cannot be deemed as a fixed asset and will not be listed on the balance sheet.

Lastly, not many people realize that fixed assets are also tax deductible which makes them a good vehicle for financial planning. As we know that, depreciation lets investors and companies lower their income tax liabilities; fixed assets too, grant the asset holder similar tax benefits because there is a possibility of depreciation with them in the long run.

Further reading: How to plan your finances in 2020

Key takeaways

✔ Take expert help or learn the basics and begin building your portfolio by making various types of investments in investment vehicles of your choice.

✔ The main steps to build a winning portfolio are – asset allocation, diversification, re-evaluation, re-balancing and making adjustments accordingly.

✔ Different types of investment vehicles discussed in the chapter are Mutual Funds and their types, Equity and Stock, Fixed assets, Savings and Fixed Deposits, and Insurance covers.

✔ Each of the agents of investment have their own advantages and risks but are a great way of wealth accumulation and expansion.


Retirement Planning

Even though life expectancy rates have increased for the present generations, the sedentary lifestyle has made us all the more vulnerable to long-term ailments and lifestyle diseases like hypertension, diabetes, heart ailments, stress-related conditions like anxiety, clinical depression and many more. Health care costs are increasing every year and leaving a large dent in our wallets than we can cope with. This has made it all the more essential to have a backup plan for retirement, what with the lack of a social security net that millennials are faced with.

It may seem too early to start planning your retirement, but you can never be a 100 percent sure if your financial condition will remain the same a few years down the line, or after a decade. When it comes to financial planning as well as retirement planning, earlier is better however, it’s never too late either. Having a backup fund stashed away will give you and your family financial security and peace of mind.

The first step towards retirement planning is deciding the age at which you expect to retire. If you haven’t given it so much as a thought, no need to worry. It’s better to start early but it’s never too late and your ship will not have sailed.

Retirement planning is not only about saving or collecting money to provide for you at a later stage, but it is also about investing or multiplying the wealth that you have collected and/or saved.

When investors have multiple financial goals, often retirement planning takes the back seat. It may seem counter productive to some but even when you have other short-term and long-term goals, you must prioritize and do your best to keep some money aside for your retirement. Even if it’s a few thousands of rupees, start with whatever you can and every rupee will be much valued later.

There are two cornerstones for any good retirement plan, determining beforehand, how much money you want to save and where. Once you have determined your amount, you can choose from any of the investment options mentioned in Chapter 5 and start investing and saving. It all depends on how much time you have left until your planned retirement, your specific needs and your comfort level in terms of risk-tolerance.

Lastly, it brings us back to the first question i.e. when do you want to retire. And the answer lies with your individual needs. Once you feel you have a comfortable amount of investments that bring you considerable returns which either supplement or substitute, your income you can choose to retire even before you reach the average age. Some people choose to retire early (because they want/have to or they can), and some people like to ease their way out of working and take longer than average retirement age to finally quit working and enjoy financial freedom for the rest of their life.

Key takeaways

✔ Retirement planning is a key component of financial planning. The end goal of every investor looking for financial freedom is to be able to retire rich and planning your retirement can help you achieve that.

✔ Decide at what age you want to retire. Determine how much time you have left and depending upon that information, devise a plan that will help you accumulate a good amount of wealth to have at your perusal later.

✔ If you are young, start retirement planning soon, if you are not so young, start right away!

✔ Determine a tentative amount you wish to save for your retirement and decide where you want to save it. Check out the investment vehicles mentioned in Chapter 5


Goal-based Investment Planning

The process of matching your future financial goals and objectives with all your available resources is known as investment planning.

Investment planning is interrelated with financial planning and it also is a key component of the latter. Neither can exist without the other.

A smart investment increases our finances and has the potential to make our future secure by increasing the standard of life. It also makes for a great way to manage one’s income, expenditure, debt and tax liabilities etc. A good financial plan is needed to backup any investment planning, it begins with identifying financial goals and converting them effectively. Each goal requires a different investment strategy, let’s take a look at how to devise a smart investment plan for different types of financial goals.


If you plan on getting married in the next few years, it’s a good idea to start saving for your big day well in advance. Since marriage is a long-term goal that requires a huge chunk of money to plan as well as execute, you may need as many years as possible to accumulate the required funds. For goals that require a large amount of funds to convert, investment vehicles like mutual funds, equity stocks, and fixed deposits make good choices. In conjunction with your financial advisor, create a diversified portfolio and begin investing in your choice of assets.


Considering that you have already forayed into the world of financial or investment planning (if you did so for your wedding), your next goal in about 5-10 years from your marriage might be to start a family. Adding another member to the family can be an expensive affair. Pregnancy alone costs a lot in case of any unforeseen complications, medications, doctor’s visits, delivery etc can be quite pricey these days. Once you bring your bundle of joy home, your expenses are bound to increase. Starting a family requires a well-thought out plan. If anything were to happen to you, your spouse would be left to care for your little one by themselves. To ensure they get all the monetary help they need, it is better to take up life and health insurance covers depending on your family’s specific needs. Apart from that, liquid assets and balanced funds that will provide a small but steady income are also a good investment vehicle.


Whether you wish to update yourself on the latest in your career field, or you have a child (or children) of school/college going age, education can get super expensive these days. It helps to have a proper investment plan to support yours and/or your children’s academic aspirations without burning a gaping hole in your income. Consider investing in comprehensive health and education plans for your children’s higher education, along with that, investing a decent amount of capital in SIP mutual funds with a combination of equity and debt funds to suit your income and financial goals is most sensible.

Vacation/Other Expenses

Medium term and long term goals like the ones mentioned above need more intensive planning and higher investments, however, if your goals are short-term in nature for instance, planning a vacation, buying a new gadget or swapping your old two-wheeler for a new one, you can easily come up with an investment plan on your own. A savings account can be a great way to accumulate a small amount of money that such short-term goals require. All you need to do is start setting aside as much money as you can to collect your required amount and then you can easily convert your goals.


Life is as unpredictable as it can get, mishaps happen all the time. Whether it may be a sudden death of a family member, a high-risk health condition, debts or any other type of emergency, it’s always better to be prepared for an unfortunate event. Starting an emergency fund should be among the top priorities for any investor. Some people argue that debt management must take precedence over an emergency fund but with a smart investment plan, meeting both goals is easily achievable. Since emergencies can strike anytime, an investment with a good liquidity (3-6 months) is preferable.

It is important to note from a beginners’ point of view, that any investment strategy or financial planning, must be thoroughly discussed with an expert, to rule out loop holes and achieve best possible returns.

Key takeaways

✔ Investment planning and Financial planning go hand in hand. One cannot exist without the other, that’s how critically inter-related the two concepts are.

✔ Any investor needs to have a through strategy of how he will go about his financial planning, and this is where investment planning comes in.

✔ You must decide what your goals are, and how you want to invest the money you intend to save for the goal.

✔ Investment plans for saving for marriage or having children will be drastically different than planning to save for education or purchasing a car etc.


Managing debt wisely

In the fast-paced world that we live in today, where social media dominates life choices, everyone is running after the high quality of life. We wear the most expensive clothes and jewellery, eat at five-star restaurants, stay in the best hotels, drive in SUVs and change our smartphones with every new launch. Often, one who can’t really afford a lifestyle like that also ends up trying to “fit in”. This has allowed for some or the other kind of debt to creep into our lives.

Whether it’s credit card, or house mortgages and other type of loans, debt is a part of the new lifestyle.

While some debts are pretty common and relatively safe to a certain extent, lack of debt management can soon spiral down into a vicious trap that one finds hard to escape. If you reach a point where you end up taking newer loans to pay off your older ones, your critical and main financial goals will get side-lined and it will be a huge blow on your overall financial plan. This is why a strategic plan is needed to manage your debt wisely. Below are some tips to better manage your debt and stay in the safe zone.

  • Make a list of all your debts – how much do you owe, whom do you owe and the deadline/due date to pay off the same if any.
  • Analyse your debt list and figure out a schedule or a plan to pay off each debt.
  • Start with the most expensive debt and set aside a good amount of pay each month from your income towards payment of debts.
  • Always pay your bills on time and in full. Credit card bills have been known to be the heaviest type of debt and it’s better to get free of this debt as soon as possible, so don’t be tempted to pay just the minimum allowed balance, but try to make your payments in full. Not only will it give you the gratification of freeing yourself from a significant debt, it will also motivate you to clear all your other debts, pronto.
  • Focus on saving more than you were used to. It does sound too much to ask of but once you cut out your unnecessary expenses, you’ll realize how much money you could have saved and perhaps used it to become free of debt earlier.
  • If you really need to take up a loan, try your best to find one that’s tax-efficient and has a lower rate of interest. Transfer your loans to a bank that offers a lower interest rate and save the extra money to invest it in a suitable place.
  • Having an emergency fund can be a huge help when it comes to staying out of debt. Try to set aside some chunk of idle money you have in an emergency fund (maybe a savings bank account or a fixed deposit account) which you can use in desperate times to either avoid taking a loan or to pay off an existing one.

Finally, the best way to manage debt is to avoid it for as long as you can, but if you do end up in a debt trap, rest assured, that there are ways to comfortably get out of it with some damage and a lot of help from a financial counselor or debt-expert.

Key takeaways

✔ Lack of debt management can throw a major road block in any investor’s financial planning highway.

✔ Smart debt management includes making a comprehensive list of all the debts you owe and planning a way to repay each of them.

✔ Focus on increasing savings, avoid falling into newer debts, control habitual spending and create a safe emergency fund like a fixed deposit to stay in the safe zone.


Planning your taxes

Taxes are a major adjacent tangent of financial planning. No financial planning is complete without taking into consideration how an investor will manage his/her tax liabilities. When planning your taxes, you need to study your financial position and look at it from a tax-efficient lens. Indian citizens are allowed the advantage of various tax exemptions and benefits depending on their financial health. If you plan your expenses and investment in an optimized manner, you will be able to save a lot of money by reducing your tax liabilities.
From a tax planning viewpoint, the section 80C and section 80D from the Income Tax Act allow various deductions and tax benefits like, those on health insurance premiums, home loans and property tax. Public provident funds (PPF), National Savings Certificate and ELSS funds are a few other investment vehicles that can help you plan your tax.

It is important to not that although tax planning is a legitimate saving and financial planning strategy, as Indian citizens, one must be responsible enough to avoid tax evasion and ensure to file your income tax returns diligently and pay your taxes duly to the government.

Key takeaways

✔ Be a responsible citizen and file your tax returns every year without fail.

✔ Knowing your taxes will give you a new perspective towards how much you are earning and whether your financial plan is working out for you.

✔ Take tax-planning seriously and know your rights. The government has certain benefits and exemptions under the sections 80C, 80D of the Income Tax Act.


Tools for financial planning

Even if you are a beginner in investment and financial planning, it makes sense to hire an expert advisor to help with your most important monetary decisions. However, hiring financial advisors can be a bit of a nip in your pocket, so if you cannot afford to hire an expert, you must concentrate on building wealth first. Hiring an expert in the hopes of building wealth someday is counter-productive. Luckily, for those who either cannot afford a financial advisor, or those who can but still would much rather do it themselves, there are many tools available to help you plan your finances and investments all by yourself.

Most of these tools are pretty low-cost and some are even free; they work by using algorithms to replicate the tasks of a financial advisor e.g. asking questions to understand your financial footing and helping make a list of goals and debts etc.

There are tools for creating a budget, and information on how to stick to one is aplenty on the internet. Loan calculators, tax-planners, retirement planning tools, SIP return calculators, and portfolio analysing apps are all excellent tools that investors can use to begin their financial planning journey.

There are many online websites that offer financial planning services at extremely affordable prices, and you can get some crucial advice from such platforms. Examples include Mint, Scripbox, FindVise, ProfitBoard and many mobile applications are also available these days.

Many banks also offer such services to their valued customers so inquire with your bank to start with. If you know how to make the most of what you have, you will soon be well on your way towards achieving your short-term goals, and you can progress from there on.

In conclusion, financial planning is the only way an individual can understand, account for and carefully manage his/her income and investments. It will help him to live a comfortable life and give their dependents a good sustenance, allowing them to make the most of the finer things in life while also saving up generously for their own hassle-free retirement.

Download the Financial Planning Guide

If you fail to plan, you plan to fail. Get started on your financial planning journey to achieve your goals.

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