By: Yasha Jain, Institute of Management, Nirma University
India is a growing economy and has a huge working population. The spending habits differ for each section of the society. For middle class population: basic amenities, children’s education are top priorities; rich class likes to spend on luxury goods and International brands whereas the super-rich class spends on ultra-luxury goods. Age is one of the important factors that affects such spending decisions. Researchers have also observed that financial literacy and financial inclusion go hand-in-hand, and that the level of education and gender of the individual are other major affecting factors, in the Indian context.
The lack of financial literacy leads to people becoming victim to fraud, bankruptcy and large amount of debt. It also means that they are unable to take advantage of the various financial schemes started by the government for their benefit. From the various studies in the past, it has been found that investors are more inclined towards traditional investments like Bank FDs, Post office Saving Schemes and still not consider market linked securities as a source of investment which leads to poor financial planning and financial crisis at a later stage in life.
Financial Planning is the key for attainment of realistic financial goals of an individual. An average Indian family generally dreams a house, a car and for proper education for the children and subsequent marriage and much more. By putting goals in place with pre-defined time frames, an individual can have more focus on the control of expense and consistent track on one’s financial goals. Some of the common financial planning mistakes people make are:
- Failing to prepare a budget
- Being not ready for emergencies
- Mutual fund confusion
- Living on borrowed money
- No periodical review of investments
- Money lying idle in cash or savings bank account generating negative returns
- Not planning for retirement
- Lack of diversification
Towards becoming financially secure, setting short-term, mid-term and long-term financial goals is an important step. you’re likely to spend more than you should, if you aren’t working towards anything specific. While saving for an expense such as buying household equipment or annual vacation in the next 12 months may be a short-term goal, saving for home loan down payment or purchasing a new car over the next 3-5 years maybe one’s medium-term goal.
The process of goal setting in financial planning include:
- Setting your financial goals – SMART Approach
- Developing financial plan
- Implementation of plan
- Monitoring of plan
Proper goal setting helps you focus and create a practical plan of action. It allows you to monitor your progress over time, force you to make adjustments& remain accountable and gives you reasons to celebrate down the line. Here, proper utilization of available resources that is investable surplus helps impulsive buying take a back seat.
Benefits from studying Personal Finance at an early stage:
- Make a budget and start saving
- Frame Financial goals
- Invest in right instruments
- Maximize tax savings
- Opt for right insurance
- Optimize long-term savings
It is important to have a meaningful financial conversation with your partner before getting married soon. This conversation include:
- Talking about credit situation, past and current of your partner.
- To decide whether to have two separate bank accounts or a joint account after marriage
- A woman, may have responsibilities towards her family. This needs to be talked with your husband to be.
- To discuss whether their financial goals are aligned? (Short term and long term).
- Who will handle the finances?
Personal Financial Planning ensures your financial discipline, gives direction, improves financial decision decision-making, safeguard self and family from any financial crisis, track investment portfolio with respect to set goals and most importantly, provides a peace of mind. As one clearly knows ‘Failing to plan is planning to fail’ and studying personal finance is important because people spend years in school to become capable of earning an income without learning how to manage them. For a woman, it becomes more important to be aware about these fundamentals so that in case of death or any uncertainty surrounding her husband, as an independent woman she can take up the task to handle finances and carry on with her life.