Financial planning an often overlooked but critical process for creating a secure financial future.
Have you just started working? If yes, how much of your salary have you already spent? Or planning to spend on meeting your daily expenses? On getting gifts for your family? And yes- buying yourself the latest gadgets and apparel as a reward for a job well done? This is where financial planning makes its debut.
While it is okay to splurge during the initial working months, it is also important to realize that the earlier you start planning for your future, the better it will be. Disciplined investing and prudent financial planning is the only way to meet your financial goals and ensure financial security.
During financial planning, it is essential to understand the three fundamentals which will majorly define your financial future- compounding, taxation and inflation.
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Compounding
Compounding is basically the principle by which returns on money also get reinvested and earn you further returns in the years ahead. And so, your money grows not in a straight line but exponentially. This is most likely, the essence of financial planning.
Illustration:
Let’s assume you invest Rs.5,000 p.m from the age of 25. Your wealth at retirement (60 years) would be close to Rs.7.3 crores. If you rather start at the age of 30 with the same amount, you can accumulate only close to Rs.3.5 crores. A mere 5-year delay can cut your wealth by 50%. -
Taxation
Taxation is an important aspect which determines the actual return you receive. Hence, a tax-free 8% return is better than a 10% return with 30% deducted as tax (you receive only 7% returns in hand).
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Inflation
Inflations eats into your purchasing power. Inflation is a scenario where the prices are rising. Due to inflation, with each passing period you will be able to buy less with the same amount. If inflation (prices) rise by 7% in one year, while your investment has fetched you 5%returns, consequently, you will still fall short of 2% of the amount if you wish to buy the same thing as one year back.
Hence, it is important to realize the power of compounding and start investing at the earliest to beat inflation and build your wealth exponentially over the years to come.
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