Basics of Financial Planning - Part 2

Basic Rule # 1 

Basic Rule # 2

                 ..is to convert earned income in to portfolio income or passive income as effectively as possible.

  This is the most important step and remaining steps are completely depending up on success of it. Many people struggle to select the best options like shares, Mutual funds etc. The options are called ‘Investment vehicle.’ Remember, there is not trial-and- error in financial planning. One minor mistake can lead your portfolio to havoc. The investment vehicle suited for one person may not suit your need. Also, the investment vehicle designed for long term needs (e.g.Insurance , ULIP) may not suit your short term needs.

  This step should start as early as possible, preferably when you have started working (or ideally even when you are studying). When we are fresher in the market, our salary used to be very less and shopping list is very big. And as our own earned money gives us independence of buying what we like, we tend to spend money. We think that it is our right. After working five or six days like dogs, we deserve all the luxuries that our money can buy. But dear young professionals, you have the best asset in your account, which can tremendously affect your wealth building, and it is TIME. Your father, uncle or boss can have more knowledge, but you have more time. And the compounding interest depends mostly on the factor :Time.

  Let me give you one example. Riya and Tony have joined a Software firm as trainees, They are fresh graduates. They are working on same floor, just few desks away. As trainee executives, the salary they both are getting is moderate, even Tony feels that is is less then other firms offer and he is always in crunches of money. Riya leads simple life but not compromising with her basic needs and needs from her profession. She saves  Rs. 2000 every month and put them  in to a Mutual Fund after thoughtful study, for 5 years. The Mutual fund gives her average 11% p.a. return. So, at the end of 60 months, she will have Rs.160494 in her kitty and effective yield of 14.57%. Saving small amount every month is not a problem. The maturity amount she gets at the end is good one and also adjusted with inflation.

  After 5 years, while  Tony is  still struggling with his finance, blaming recession and his company for his financial struggle, or even hopped many jobs to get settled money wise , Riya could have bought a house or car or may be again put all her money in some other investment vehicle to build her wealth.

  Remember, Rs.1000  monthly put in investment vehicle , which gives 10% annual interest, compounded monthly, can give you about Rs.78000 in 5 yrs, Rs. 2,06,000 in 10 yrs, Rs, 4,17,000 in 15 yrs. So, the long the duration of your investment, the better the returns are. Start early.

  Basic Rule # 3 will be published on Monday, 25^th Oct, 2010..Keep reading.

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