Financial planning is a process that provides you with a framework for achieving your life goals in a systematic and planned manner while avoiding surprises and shocks.
It has goals such as determining capital requirements, developing financial policies, and ensuring that scarce financial resources are used as efficiently as possible.
It is difficult to instill the habit of financial planning in young adults. However, when they volunteer to plan their finances, they have no idea where or how to begin.
Here are 10 golden rules to follow when planning one’s finances.
Smart Ways to Make a Financial Plan
1. Manage your Money
Money management does not have to be boring. It’s not rocket science, and you don’t have to come from a financial background to do it. You only need to be a little bit committed.
Making the decision to save is the first step toward financial management. Saving money can be a significant step toward financial independence. Consider borrowing from a friend for that last-minute doctor’s appointment!
If you don’t have any friends, you may be forced to use your credit card. And you already know that credit card debt is the most expensive type of debt. Repeat this a few times, and you’ll find yourself in a debt trap before you understand it.
You may have several financial objectives in mind. Such as purchasing a car, the latest smartphone, or accumulating wealth. You need money in all of these situations.
But from where will it come? You must have savings!
Invest for the long haul. Don’t get too greedy and don’t get too scared.Shelby M.C. Davis
Saving money keeps you from getting into debt. Not only that, but systematic saving on a consistent basis can make you wealthy. You may be able to meet your financial objectives on time. You might be wondering how to save now. And, perhaps more importantly, how much money should be saved? As soon as you get your paycheck, start categorising it. These categories include expenses, EMIs, investments, and savings.
Make it a habit to save at least 10% of your monthly income. It really can be that simple! However, do not deposit it in a piggy bank. Money sitting in a piggy bank does not grow. Even a savings account may not yield higher returns.
Instead, you could put this money into a liquid fund. A liquid fund is a type of debt mutual fund that invests around 4% of its assets in fixed-income generating instruments such as FDs, commercial paper, and certificates of deposit. Invest your savings every month over a long period of time and see what it can do for you!
2. Understand your Expenses
Before you spend, it is critical to understand your income. Keeping track of your expenses will give you a better idea of your spending power. For example, if your monthly income is Rs. 20,000 and your monthly expenses are Rs. 22,000, you are in the debt circle. To avoid this, identify the extra Rs. 2,000 you’re spending and cut back on it.
You can then decide what is important and what is not. This will allow you to better plan your finances and save money.
The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.Benjamin Graham
Make sure you commit to your budget. Consider it as a commitment instead of a burden and stick to the boundaries.
3. Maintain a personal balance sheet
A personal balance sheet can help you understand what you own and what you owe! It’s a very effective tool for taking your finances to the next level.
It is a statement in which you can list your assets and liabilities. Your personal net worth is determined by the difference between your assets and liabilities.
Gather your bank statements and other proofs of liabilities before you begin. Then, make a list of your assets, such as your bank balance, investments, home value, and the value of other assets. Add up all of your assets to get the total value of your assets.
List your liabilities as well, such as your car loan, home loan, credit card balances, and remaining balances on other loans. The total of your liabilities will reveal the amount you owe.
In the short run, the market is a voting machine. In the long run, it is a weighing machine.Benjamin Graham
Ideally, your net worth should be positive, which means that the money you own exceeds the money you owe. Don’t give up if the news is bad. As you repay your loans, your net worth will gradually increase.
4. Set a Budget
The most important step in developing a great financial plan is to create a budget. This enables you to comprehend your income and expenses.
It will assist you in making better spending decisions and controlling costs.
5. Set Personal Goals
Setting a goal will help you understand where you want to go in the allotted time. It will motivate you to make the best use of the resources and funds at your disposal.
Personal goals can range from purchasing a bike to travelling to purchasing a home.
So, before you begin financial planning, you must first understand and identify your goals. The best approach is to divide your objectives into three categories: short-term, medium-term, and long-term. Purchasing a bike within a year may be a short-term goal, whereas purchasing a house is a long-term goal.
A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.Warren Buffett
Setting goals based on the estimated time required will help you plan your income better.
6. Save money
Saving money entails saving a single penny! It could be avoiding purchasing a can of soda to save Rs. 20. It’s critical to keep track of how much you spend so that you can devise a savings strategy. The ‘avocado toast’ is a well-known trending concept that simply shows how saving on small things can help you buy a house.
Rule #1: Don’t lose money. Rule #2: Don’t forget Rule #1.Warren Buffett
This is not the first time that a trendy food has emphasised the importance of financial planning. Financial planners have taken notice of millennial spending habits on expensive coffee and other items.
If you use proper financial planning, you could save a lot of money. Making a budget is one of the many ways you can begin saving. This will motivate you to save the specified amount each month.
7. Fixed Deposits (FD)
In India, this is regarded as one of the most popular and secure ways to save money. You must save a large sum of money all at once. They pay a higher interest rate than a regular Savings Account.
8. Public Provident Fund (PPF)
Because it is a government investment scheme, this is another safe investment option. It has a 15-year commitment period. Because the government guarantees your investment in the scheme, it is a popular scheme in the country.
9. National Pension Scheme (NPS)
This plan combines various investment options such as Fixed Deposits, Liquid Funds, and Corporate Bonds. This initiative was launched to encourage people to save for their post-retirement lives. During their working years, an individual can invest a set amount each month. This is also backed by the government, making it a more secure investment.
10. National Savings Certificate (NSC)
This is yet another government-backed safe investment option. This is primarily for investors with low to moderate income. It is a savings bond that encourages investors to invest while also saving them tax. You can begin investing with as little as Rs.100 and gradually increase your investment.
11. Create an Emergency Fund
Setting aside a specific amount of your income for emergency purposes will come in handy when something unexpected occurs. You can invest your money as an emergency fund, but you should be able to withdraw it if necessary.
Invest for the long-term.Lou Simpson
- Decide the amount. For instance, you decide you need Rs. 2 lakh as an emergency fund.
- Create a separate Bank account to save money.
- Decide the amount you want to invest every month and invest.
Liquid Mutual Funds:
- Liquid Mutual Funds have no lock-in period.
- There is no entry or exit load.
- Instant Redemption.
- Higher interest than a bank savings account.
12. Manage your Debt wisely
A lack of debt management may eat up a large portion of your pay. You may have to take out new loans to pay off old ones. If it spirals out of control, you may find yourself in a vicious debt cycle. Your most important life goals may be put on hold, and your retirement may be postponed.
5 are ways to avoid debts:
- Don’t spend more than you earn.
- Avoid impulse spending.
- Avoid using a credit card unless it is absolutely necessary.
- Compare prices before making purchases.
- Pay with cash whenever possible.
The first step toward increasing wealth is financial planning. As a result, if you are in your twenties and just starting out in our profession, make sure you plan your finances thoroughly before proceeding.