17-Oct-2018 written by : FSI-Team
Do you think financial planning is very complicated because of the financial jargon and the numerous calculations involved? Do you tend to avoid financial planning for the very same reason? If your answer is yes, here is some good news for you. Financial planning can be made easy with some simple calculations. Here are some to help you get you going:
The first thing that comes to mind is your future goals. Every one of us has common life goals to meet such as buying a house, or saving for the education of your children. These goals are typically medium to long term in nature. For instance, your goal may be to save for the education of your child for a course that costs Rs 10 lakhs today. Assuming that the child is three years old now and need to find out how much you need to save for the same course by the time she is 18, i.e 15 years from now. The important factor to take into consideration here is inflation. To calculate the future value you can use a simple formula like this:
FV= PV (1+r/100) n
FV= Future Value
PV = Present Value
R= Inflation rate
N= Number of years to the goal
For an salaried individual, the best route to meet his future long term goals is through the systematic investment plan or SIP route. SIPs provide the flexibility to invest as little as Rs 500 each month and build your assets in a regular and disciplined manner. Besides, investing through the SIP route takes away the worry of market volatility due a mechanism called rupee cost averaging. When you invest a fixed amount through a SIP, you get more units when markets are low and a greater number of units when markets are high.
As a result, you not only get the benefit of averaging out your costs, it also lessens the impact of short term volatility on your investment. SIPs however work best when tied to a goal. Thus, it is wise to calculate the amount you need to save through SIPs to meet a goal beforehand.
During the course of life, there will be situations in which you will need to take loans such as personal loans to meet a requirement. In the present day, it is easy to get unsecured loans that do not require you to pledge any collateral. However before you decide to borrow from a lending institution, you need to check yourself whether you are in a comfortable position to take a loan or whether you are overborrowed. Any easy way to assess this is by chalking out your debt to asset ratio. Ideally your debt to asset ratio should not exceed 50%.
Total liabilities include all your existing lines of credit like personal loans, car loans, home loans and the like. Total assets include all you investments such as real estate, stock market shares and mutual fund units, fixed deposits, jewellery and cash.
Another way to checkout your loan eligibility is through your credit score. This is a three digit score assigned to you by credit bureaus on the basis of your credit handling or how you are dealing with your existing credit lines. Factors such as repayment track record, credit utilisation (the total amount of credit you are using as against the total amount made available to you, play an important role in the determination of your credit score.
CIBIL is India's oldest credit bureau. Thus the score assigned by CIBIL is considered by most lenders as a part of their credit assessment process. A CIBIL score of 750 and above (out of 900) is considered satisfactory and it can give you access to the loan you need at competitive rates of interest. Your CIBIL score can thus be called a barometer of your financial health. You can check your own CIBIL score and CIBIL report to find out whether your financial health is in order. CIBIL also provides you the facility of checking one free CIBIL report in a year. You can access this facility just before you make a new loan application.
Once you are assured of your loan eligibility and repayment capability, you can check out the amount of loan you need to meet your requirement at hand. Thanks to the presence of numerous web aggregators it is possible to find out your exact loan amount before you take a loan. This is a useful tool because it prepares you to make a repayment and chalk it in your budget, even before your loan EMI is deducted from your savings account. You can use a generic loan EMI calculator or use the EMI calculators provided by most lenders on their website.
Whatever is your financial need, it is important to be in sync with your financial goals even when you decide to borrow money. By ensuring that your CIBIL score is satisfactory you can be assured that you are maintaining the much needed balance between saving for your future and repaying your current liabilities.