Financial planning may sound like a challenging task, but it isn’t if you do it right. Personal financial planning for beginners only sounds challenging, but if you consider these 10 things, then it will work out to be the best for you.
You must have heard the word Financial Planning a lot of times in your life, but have you ever thought what does it mean in your life? Financial Planning is a process that offers you with a framework for achieving the goals of your life in a simplified and streamlined way by reducing shocks and surprises.
Well, it is a pretty huge concept that comprises many things such as budgeting, planning, saving, retirement, insurance and most importantly getting out of debt. If you are a beginner, don’t worry, you need not be a financial planning expert and learn thoroughly about these concepts.
There are some points that you need to know and understand how they can impact your finances and then you are good to go. It is not substantial to start this at the beginning of the financial year; instead, you can start whenever you want, as the basics would remain the same.
Before getting into depth about financial planning, let us first understand some of the benefits that you would have:
- Evaluated your financial condition: If you do personal financial planning in advance it provides insight about your exact financial condition. For this, you just need to prepare a budget and know about all your investments, income, policies, assets, and liabilities. Once you have everything in account, it becomes easy to evaluate your financial position
- Keeps you focused on money goals: Financial planning keeps you centered towards money goals irrespective of your financial position. If you are financially sound then you would think of investing and making more money from it and if not then you would think of planning in a way that it lessens your debt
- Increases awareness: Financial planning makes you aware of what is going on with your money. If you know your exact situation it solves half your problem already. In order to live a good lifestyle today and in the future, it becomes substantial for you t take into account saving and so retirement planning from it. Ensure to develop easy money-saving habits such as using less credit card, paying off your loans as soon as salary comes, etc.
- Enables you to produce extra money: You must have heard a lot of times that investment done right is an investment for life. Perhaps, keeping this in mind always invest carefully and wisely. Always scatter your investment into numerous fields instead of investing it in one place. Investment diversification is vital as it involves less risk and better returns.
Personal Financial Planning For Beginners: 10 Things to Consider
Thus, take financial planning seriously and reap more benefits from your existing income. So, here are a few things to consider for beginners to do their personal financial planning:
The first thing that you need to understand is the need and value of a budget. As you would not be able to accumulate where your money is running without making a statement. Irrespective of the amount you earn it is imperative for you to set up a budget.
A spending plan is like a road map that tells you where to spend your money. The best thing about preparing a budget is that you get to know how much income is coming in and what is going out every month. If you have a good and complete budget made, you will be able to make more intelligent choices with your finances.
A spending plan helps you in assessing the funds better; as if you have spent more in one area then it would stop and think about the other purchases.
You can create a budget either on a paper or on your laptop; you can also use any budgeting software or a spreadsheet for making a budget. As you are a beginner you can try some of the apps or ways and choose the best one as per your convenience.
2) Get paid what you are worth and spend less than you earn
Many people know about this but it is quite difficult to apply practically. You should always know about the worth of your job in the marketplace by conduction evaluation of your skills, job tasks, productivity, going rate, and your contribution to the company.
Even $1500 yearly can make a huge difference to your budget and savings. So, before joining anywhere make sure that you are getting paid the right amount. The next thing you should take care of is that never overspend as it can lead to debts or overburdened in the coming months.
Do not forget to do a little cost-cutting every month and save some money as it can help you to spend when required plus would increase your savings.
3) Planning for Retirement
Retirement planning has become even more important as compared to a few years back. There are a lot of reasons why people have become more inclined towards it; firstly, life expectancy has increased and people live longer as compared to the previous generations.
Secondly, nowadays people have a sedentary lifestyle because of which they are prone to diseases like hypertension, heart attack, and diabetes. Healthcare costs a lot of money, so for handling any sort of ailments you need money.
Thirdly, money is required for handling all other issues that might come across when you are retired. Retirement planning should become your preference instead of an afterthought.
In fact, there are a lot of companies that offer a 401(K) plan; in this, your employer would put the same amount as you in your retirement account up to a certain extent.
Thus, you should start planning from today for your retirement it is the right time, as the quick, you start the richer you are when you retire.
Also Read: Financial Planning: Why Is It So Important?
4) Getting out of Debt
If you do not manage your debts properly then it might take up a huge part of your paycheck. Even after making a sound budget and cutting down on expenses, you would find yourself with lingering debt that you need to get rid of.
If you do not plan it properly then there might be a situation where you end up borrowing loans to pay off the old loans, it might become a vicious debt trap.
The first action that you should take is to spend more than the minimum amount due each month. Keep track of how much you owe to whom and make a schedule on how to pay them off.
You should always start by paying off the most expensive debt first and try and keep debt as the last resort.
Using credit and borrowing money is not necessarily a bad thing but if you borrow more than you can pay back then it becomes a problem. Hence, if you plan your debt payments properly it might keep you away from such troubles.
5) Have a savings plan
The first thing that you should do once your salary comes in, ‘Pay yourself first.’ Managing your own money can never be boring. The first step that you should take towards financial planning is saving. It is one of the most powerful ways of financial independence.
If you wait to pay all your expenses and other financial obligations, then by the end of the month there are very fewer chances that you would have anything left in your account. Make a resolution to save at least 5%-10% of your salary before you start paying your bills.
Saving money helps you to stay away from the debt traps, for example, you wish to buy a new car, then instead of borrowing it from your friend or taking a loan for the complete amount, it would be great if you already have savings.
In fact, as a beginner, it is important for you to know that systematic savings can help you become rich as you would achieve your financial goals in a timely manner. The best way to save is by putting money under different heads such as expenses, EMI, the salary of people working under you, savings, etc.
Also Read: Top 50 Ways to Save Money in India 2020
6) Buy Insurance
You should understand that life and property both are vulnerable to risk. Hence, it is important to get it insured. Once you create the budget, check on expenses, and eliminate EMI payments you should think of this important aspect Insurance.
Everyone strives hard to create a stable financial foundation for their family, thus it requires to be protected. These risks can lead to loss of income and put you and your family in financial jeopardy.
Accidents and mishappenings do and can happen, so if you are properly insured you would be saved from the financial crunch that might happen.
You can opt for a term insurance plan as that offers high-risk coverage at a nominal price as the return from the life insurance policy is minimal. Insurance is like a roof on your head which saves you from every bad season.
Make sure that before buying any policy like health care, lifetime, for any goods, etc. compare the prices and choose the best as per your requirements.
7) Invest cash wisely
The first thing when you think of investment is creating an investment portfolio as it might be your first step towards wealth accumulation. Well, investment comes after savings and retirement plans; if still the money is left then you should consider investing your money.
You should create a portfolio in which you should allocate your investment among asset classes like debt, equity, and cash, this is called asset allocation. It is recommended to invest in equity first as it has a good return but it is also not wise to invest all your money in equity.
Ensure that you invest in long-term as it has high profits and returns. In fact, the investment that you do should be for at least 10 years. Being a beginner in this field you should ensure that you do not go for higher risks always try and opt for investment which has comparatively fewer risks if you want to secured revenue.
8) Planning your Estate
Each one of us has some of the other assets such as vehicle, house, gold, cash, and other such things. Have you ever thought who would carry forward and take it when you leave this world? Take the responsibility now and think before-hand about it. It is paramount for everyone to assign these assets to the concerned individual in the right manner.
There are a lot of financial planners who think this is only for wealthy people, but this is not right. In fact, estate planning is for every individual who does not want to leave his assets in the wrong hands.
Instead of delaying this, you should always plan about this in advance. It is very easy to do this, just make a list of your assets and beneficiaries whom you want to allow it. You can make a will that is in the best favor of your dear ones.
The benefit of this would be that your beneficiaries would face no challenge in getting the ownership of your assets. You can also contact a good lawyer if you are not aware of how to do this.
9) Maintain a personal Balance Sheet
This is a great way of managing your funds as this sheet clearly tells about your revenue and expenses. This is one of the best ways to take your finances to the next level in this statement you need to make two columns of assets and liabilities. The balance sheet is an easy way of knowing your net worth.
Being a fresher it is important for you to fetch the bank statements and other proofs before making the balance sheet. The major things that you should include in assets are all your investments, bank balance, home value, gold, and other valuable assets.
Total the cost of all your assets and see the value. Once you are done with assets then fill in the liabilities column with the loans that you have taken, credit card due amount, EMI’s and any other borrowing. Once you subtract liabilities from the asset if the result comes in positive that means that you have more money than you owe to others. In case if it is negative, then make sure that you work towards it month by month paying off the debts. This would help in increasing the Net value gradually and make the negative-sum to positive.
10) Plan your taxes
If you are not vigilant in keeping thorough records that mean you are not claiming all your allowable income tax deductions and credits. Tax planning is really important as it helps you take advantage of numerous tax exemptions, benefits, and deductions. It would help you in paying less tax in a legitimate manner.
But, make sure that you do not get into tax avoidance or evasion. There are arrays of tax exemptions that you can get to know from Section 80C to 80U provided in the Income Tax Act.
One of the best ways of doing it is to make a system and use it all around the year. It becomes easier for you as you would not have to find everything while filing tax, this way you would not miss on any items which might have saved you money.
Some of the most used ways by expert financial planners are Equity as it has a small lock-in period as compared to other investments and it also provides you tax exemption.
Here are some tips for beginners which can help you save some more money and benefit you in financial planning:
1. Cutting Expenses: Try and cut down on the unnecessary or avoidable expenses which can help you save money. You can do this by categorizing the expenses into fixed and variable, urgent and non-urgent, avoidable and unavoidable, and necessities and luxury. This way you would easily get to know and make the right decision on where to spend and where to cut down on expenses.
2. Pay off Credit Card debt: This should be on number one in the list when it comes to borrowings or debt. It is one big hindrance to get ahead financially as they are so easy to use and people tend to forget that it is the real money which they are dealing with.
You tend to purchase more things that are not needed from credit cards and get stuck by paying it every month. You should make sure that you use the credit card only in case of emergencies as else you would get stuck in its vicious circle which would ruin your savings and other financial planning.
3. Create an associate emergency fund: This is again a good idea for emergency situations which would save you from using your credit card as well. For creating an emergency fund you can keep some amount of your salary in it or save the money you get as a gift from your friends, parents, or loved ones.
Keep yourself strong and spend this money only in urgencies like job loss, medical emergency, admissions, etc. Just save a very little amount of your salary but this can help you majorly in case of unforeseen situations.
4. Dealing with surplus cash efficiently: The way you deal with your extra cash would determine your future. It is important to plan it as else you would indulge in overspending. Each passing year everything would get expensive thus if you invest properly it would help you to bridge the inflation gap.
You should begin with identifying your goals such as buying a car, home, etc. and save for it accordingly. Doing investment properly can channelize your extra cash in a better way and also counter inflation.
After reading these tips you must have got an insight into financial planning as a beginner. Make sure that you follow the maximum points as it would not only help you in saving but also you would be able to invest the surplus money.
Just remember that planning starts from making a budget so whenever you think of doing so make an adequate budget and work accordingly. This would help you in managing and planning funds in a better way.