Are your parents and elders badgering you to do some proper financial planning from the dawn of time? Financial planning means to keep track of your expenses and finances to meet a certain objective. You know your parents are right when they ask you to make a better attempt at proper financial planning.
Are you confused about how to go about it, though? No worries, financial planning can be done efficiently. It is quite simple and is not as tricky as the stereotypes attached to it say. Proper financial planning can help you devise useful and fruitful strategies that bear results and ultimately, fulfill your aspirations and goals.
It is necessary because it gives a sense of clarity and helps to deal with situations of a sudden nature with agility and calmness. It yields benefits in the future. Whatever you let go of in the present for proper financial planning, is all going to come back in the future, possibly in forms different than the original. But they are going to be extremely beneficial.
There is no specific way that can be followed for financial planning. It will be specific and tailored to your individual goals and approaches. However, there is still a thread of commonality that runs along the way we go about financial planning. The rules below can be considered for proper financial planning. They are as follows:
Set Goals and Aspirations
Before you set on your quest for proper financial planning, you must define and set goals for yourself. You must plan out starting with penning down your aspirations which will help you get a grasp of your goals.
You could be planning for anything. It could be for your education, for your vacation, for your retirement, for a gift, for a party that you want to throw for your friend.
Once you get a hold of the goals that you are working towards, you can adopt a target-oriented approach and get assured results.
Further, make sure that your goals are attainable and realistic. They should not be imaginative and without a sense of facts.
Monitor and Supervise Expenditure
Once you understand your goals and aspirations, you can accordingly set limits on your expenses. Depending on your goal, you will decide what percentage of your income will you save and what percentage will you spend.
For this, one must remember the rule, “pay yourself first” by heart. It implies that you will keep a certain portion of your income separate for yourself and use the rest for your day-to-day expenses.
How much you must save isn’t universally decided but according to economists, saving 10% of the post-tax income is recommended subject to one starting a career at 25. This percentage must keep on creeping up. It will create a buffer against future risks.
There is also the 50-20-30 rule according to which 50 percent of your income can be kept aside for your daily expenses, 20 percent should go towards your savings and the rest 30 percent towards your other expenses which may include outings, shopping, travel, etc.
Again, what you decide will depend on the targets you have set for yourself.
You can always consult a financial planner for the same.
Assess The Current Financial Situation
While you set to do some financial planning, you must be aware of your current financial situation, without which key decisions and plans cannot be made.
You can do this by computing your net worth, listing your assets and liabilities and taking care to keep them in mind when you work towards achieving your goal.
A glance at your current financial situation will give you a head start when you set out to do proper financial planning.
Set Aside an Emergency Fund
As the name suggests, this fund is and must be kept aside for situations that are out of your control and sudden. An emergency fund can be very helpful in dire situations when monetary support from others is negligible. It makes you independent and self-assured that you can handle and effectively cater to any and every situation that might occur in the future.
It does not do anything for your planned goals, but it does create a safety net, thereby making the future a bit more secure.
Plan a Monthly Budget
In addition to assessing your current financial status, you must also, work to plan out a monthly budget to keep track of your expenses.
Through this, you will be able to identify which areas you spend the most money on and how can you cut down on them or how can you appropriate your income to meet your goals and fulfill your aspirations. It will help you keep track of your irregular and variable expenses and thus, will help you plan accordingly to strive in pursuit of your goal.
It will give you a fair account of your expenditure and savings, thus, minimizing trouble in the long run.
Learn to Make Saving a Chore
Saving is very important and is in fact, central to proper financial planning. While it seems easy on paper, to actually do it is quite a daunting task.
One must get in the habit of saving. It will be beneficial in the long run and will by an extension aid you in reaching towards your outlined goals.
Remember that saving should not put a burden on you. It must be an amount that you are comfortable with keeping in mind your regular and fixed expenses. It does not matter if you start small. What matters is that you saved something. Something is better than nothing.
Also, there are certain saving incentive schemes through which the government or your employer contributes towards your savings and/or offer other forms of compensation. Keep a lookout for them and take full advantage of them.
Investment process can be a great way to earn future benefits by reducing the amount spent today and saving it. They help you reach your goal a bit quicker as they offer returns on the saved amount. You can invest in mutual funds, bonds, stocks, real estate, etc.
But the only problem with investments is that they are not risk-free and might end up causing you monetary loss. Thus, careful planning is required for investments. People take the help of financial planners and financial advisors. Some even refer to various websites to assess the best place for them to invest in.
Before you decide where you want to invest you need to understand the various types of investment, how much risk you can afford, how much you should invest, how much will you get in return, etc. Investment planning cannot be done haphazardly. Once you know the risk you can take, you must choose to invest somewhere that is suited to your goals and aspirations. It cannot be done irrespective of the outlined goals.
Update Financial Planning Strategies as you Update Your Goals
The best part about planning is that you can always rework your planning strategy. We are dynamic beings who keep on working on ourselves, on our goals, on our choices and thus, this changing nature requires that as you update your goals, you also modify your financial planning strategies as per the changing goals.
This can be attained by keeping a balance between flexibility and rigidity. Your plan should be flexible enough to let you modify certain plans. But it should also be rigid enough to avoid mindless and careless expenses. This complicated balance is tough to achieve but can be achieved with experience and time.
Avoiding the Cycle of Borrowings and Debt
While borrowings may seem like an easy way out, they really are not. They might help you get closer to your goal, but if not paid back, they can trap you in a vicious debt trap. And to escape from this debt trap is nearly impossible.
It takes a lot to recover from the financial burden that is caused by borrowings and debt by extension.
This can be done by carefully planning how to cut down expenses, how to manage savings along with borrowings, etc. If one is not careful with regards to borrowings, a good financial situation is nearly impossible. One must ensure that no matter how small the debt is, it is paid off. It is not delayed on the pretense of you paying it later on.
Good financial planning is something for which we should strive for. Our parents, our elders, the economists are right when they say that every individual needs to do proper financial planning. Without it, the financial arena of our lives can go haywire. Thus, it is essential that we take out some time and set out to do proper financial planning. It might take some time to devise a good and fruit-bearing financial strategy, but as you gain experience, you will find the right strategy.
Sound planning can be done alone and independently, but if one needs help, there is nothing wrong with it. You can consult a financial advisor or a loved one you trust with money matters. Given the plethora of resources available, you can always surf the net to decide your path of financial planning. But take care to ensure that the website you choose is reliable and trustworthy.
Be aware and make informed decisions. Do not be duped by schemes that seem profitable. Read thoroughly about the schemes available and go for it only when you are sure of it. Don’t be too spendthrift. Ensure that you save and invest. All in all, proper financial planning is a must for everybody.