List income, assets before you make a financial plan
Last week, we went through the first steps in preparing a financial plan: your financial objectives, your liabilities and your expenses . Th...
https://iskablogs.blogspot.com/2010/02/list-income-assets-before-you-make.html
Last week, we went through the first steps in preparing a financial plan: your financial objectives, your liabilities and your expenses .
This week we complete the next two aspects : assets and income. Let’s plunge straight into that exercise. One of the key benefits of doing this exercise is to dust the cobwebs off some old papers lying inside a briefcase or a decrepit drawer to find the details .
Of course, I’m referring to assets that you invested in a long time ago, but forgot the details.
Let us start by listing physical assets. These could be in the form of land, villas, an apartment — any form of real estate; or physical gold or silver, antiques and art.
The value of your home cannot be included in your “realisable” net worth, as it is unlikely to be disposed of for any objective. All assets must be considered at their latest estimated realisable value, albeit conservatively.
Physical assets can be productive (revenue generating) or passive — an example of the latter is a piece of land for investment purposes, which does not generate any rental or even agricultural income.
From the realisable values , remember to reduce the outstanding portion of your loans against them.In general, we consider financial assets to be liquid; however, there are exceptions. An investment in ELSS (Equity-linked Savings Scheme of mutual funds) has a lock-in period of three years without an exit option, and hence, is illiquid for that period.
It is important to understand rates of return of all financial assets, the tax implication on them, and the dates of maturity. In order to arrive at a meaningful comparison, pit post-tax returns of one investment against another. For example, a bank fixed deposit of 6.75% pa (taxed at 30% slab) is less attractive than a debt mutual fund with dividend option (taxed at sub-16 %) which earns 5.5% pa.
Remember to include the latest value of your provident fund balances (yes, this is a wake-up call to all those who have not transferred the balances from their previous organisations to their current ones) when arriving at the fixed income component of your assets.
Finally, include the equity investments , taking care to ensure that they are in a demat form, and the latest value of equity mutual funds, with nominations required in place. While collating your bank balances, pause for a moment to consider whether all the bank accounts you have continue to have a need: remember, each one has some minimum, idle balance which isn’t earning much
INSURANCE POLICIES
Most of us believe we have adequate insurance , but are fuzzy about the cover and the terms of the policies purchased. Now’s a good time as any to read the policy document with the terms and conditions, and then list the sum assured, the benefits, the maturity date and the premium frequency.
INCOME
For the salaried class, this is easy, unless you are the type that does not read your pay slip nor verify the bank credits. Remember to be conservative with the lumpsum expectations of annual bonuses.
For businessmen who do not pay themselves a salary, this is difficult to estimate; but they should consider what they would demand to earn if they were not the sole owners. After all, your business and your self have different objectives , however, hard you would want me to believe otherwise.
We have now completed the theoretical groundwork for getting started on your financial plan. Next week onwards, let’s get practical.
This week we complete the next two aspects : assets and income. Let’s plunge straight into that exercise. One of the key benefits of doing this exercise is to dust the cobwebs off some old papers lying inside a briefcase or a decrepit drawer to find the details .
Of course, I’m referring to assets that you invested in a long time ago, but forgot the details.
Let us start by listing physical assets. These could be in the form of land, villas, an apartment — any form of real estate; or physical gold or silver, antiques and art.
The value of your home cannot be included in your “realisable” net worth, as it is unlikely to be disposed of for any objective. All assets must be considered at their latest estimated realisable value, albeit conservatively.
Physical assets can be productive (revenue generating) or passive — an example of the latter is a piece of land for investment purposes, which does not generate any rental or even agricultural income.
From the realisable values , remember to reduce the outstanding portion of your loans against them.In general, we consider financial assets to be liquid; however, there are exceptions. An investment in ELSS (Equity-linked Savings Scheme of mutual funds) has a lock-in period of three years without an exit option, and hence, is illiquid for that period.
It is important to understand rates of return of all financial assets, the tax implication on them, and the dates of maturity. In order to arrive at a meaningful comparison, pit post-tax returns of one investment against another. For example, a bank fixed deposit of 6.75% pa (taxed at 30% slab) is less attractive than a debt mutual fund with dividend option (taxed at sub-16 %) which earns 5.5% pa.
Remember to include the latest value of your provident fund balances (yes, this is a wake-up call to all those who have not transferred the balances from their previous organisations to their current ones) when arriving at the fixed income component of your assets.
Finally, include the equity investments , taking care to ensure that they are in a demat form, and the latest value of equity mutual funds, with nominations required in place. While collating your bank balances, pause for a moment to consider whether all the bank accounts you have continue to have a need: remember, each one has some minimum, idle balance which isn’t earning much
INSURANCE POLICIES
Most of us believe we have adequate insurance , but are fuzzy about the cover and the terms of the policies purchased. Now’s a good time as any to read the policy document with the terms and conditions, and then list the sum assured, the benefits, the maturity date and the premium frequency.
INCOME
For the salaried class, this is easy, unless you are the type that does not read your pay slip nor verify the bank credits. Remember to be conservative with the lumpsum expectations of annual bonuses.
For businessmen who do not pay themselves a salary, this is difficult to estimate; but they should consider what they would demand to earn if they were not the sole owners. After all, your business and your self have different objectives , however, hard you would want me to believe otherwise.
We have now completed the theoretical groundwork for getting started on your financial plan. Next week onwards, let’s get practical.
(The author is the MD and chief financial planner of International Money Matters Pvt. ltd source;et
