Some people would like to understand the basics of investing before getting in to the pool, while others dive directly and then learn to swim. However, the people who seek for advice and confused by two approaches to managing finance. One is the simplified approach that says have six months of liquid cash in case of emergencies, do not borrow and invest in SIPs for your retirement. The other is rather a complex approach that customizes for each investor and needs a lot of information and various means of investment.
A handy way is to think of running your household as the balance sheet of an enterprise. In case of a house, humans are assets that generate revenue while log-term assets generate revenue in enterprises.
Like a vision for a business enterprise, a household also needs to have a vision, be it generating wealth for future generation or providing some amount for charitable causes. The household method of assessing income and expenses on a regular basis is something that is very much necessary and crucial for a business too.
The four pillars of financial planning which are Assets, liabilities, income and expenses are to be monitored. Assets give you income which after meeting expenses, leaves surplus which helps you to create or plan for more assets. As asset is built in order to generate an income when necessary. A household lumpsum when needed can be planned if known initially. This can be a financial goal for example children’s education funds.
Assets play an important role in household. If one has built enough assets that can replace his/her regular income, one is ready to retire. The assets need to be planned and carved towards the growth of future needs and the income for current needs. The crux of financial planning is about estimating on how much money will you need at what point of time, how much needs to be saved and how it is to be saved i.e. in terms of investment.
Finally, there are two things that decide one’s personal balance sheet. Firstly, it is the income, expenses, assets and liabilities that one should know and plan accordingly. Secondly, it is one’s ability to take risks associated with investment decisions. Financial Planning is all about making choices from the context of a personal balance sheet.