Financial Independence : Financial Planning a relook

In my earlier posts we looked at creating a structure for getting Financial Independence. Thus so far we have looked at

1. Setting goals
2. Listing down Asset & Liability
3. Create a Simple Cash Flow work sheet

Having done above, next step is to start working on financial planning aspects which consist of following steps

1. Revisiting your goals and checking if they are realistic breaking them up on time scale like short term goals and long term goals.
2. Managing Assets
3. Controlling Liabilities
4. Tax planning

1. Setting Goals:

Be realistic: It is important to set realistic goals that are within your reach. Who won't aspire to have a 100% returns in matter of year or two that would simply be wishful thinking. Or for that matter say one may aspire of owning a grand palatial house in Tahiti island / Ferrari car. They sure can qualify as dreams and we can try and work towards that but need to check if it is realistic.

Having set the goals we need to identify time frame of each goals as short to medium term and long term goals

e.g. of short term goal can be savings to make the down payment for a home mortgage or say buying a car

e.g. for long term can be building a corpus for retirement, or say creating a corpus for child's higher education etc.

Goals needs to be flexible and may change over a period of time, thus as stated in my earlier posts we need to revisit our over all financial plan at regular intervals (ideally once a year) to check if we are proceeding in the right direction, if goals are still the same or needs some fine tuning

2. Managing Assets:

Identify the quality of assets you have. Assets can be broadly classified into two categories Wealth creating / growing assets or assets with depreciating value.

Example of growing asset : Bank deposit, Home, Equity, Government securities, Gold, bonds, Insurance etc.

Other Assets whose value depreciate with time: Car, Bike etc.

3. Controlling Liabilities:
Again liabilities can be of two types a good liability or a bad one

Example of good liability could be a loan that goes towards creation or purchase of wealth creating asset for e.g. home loan, education loan etc. A bad liability can be advances / loans to pay of say purchase of fancy car or expensive mobile phone, credit cards dues etc.

So based on 2 and 3 a good financial plan should aim at creating wealth creating assets or growing asset and reducing liabilities. Thus move your cash flow towards generation of growing assets and clearing off debts / liabilities off our books.

4. Tax planning:

A good financial plan needs to be tax efficient in the sense to make most of the tax benefits as we plan investing in creation of assets. We need to plan for taxes as almost 30% of our earnings gets deducted on account of tax payments though we cannot possibly eliminate tax liability completely but by careful planning we can reduce to liability to maximum extent possible. Remember a penny saved is penny earned.

In my next article I will focus on various instruments from perspective of savings, tax implication as on and possible returns on each of them.