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Have you ever been confused about what financial planning activities you should be performing? This guide will help you answer that question.
Creating a personal financial plan needs a holistic approach to managing your money, including your finances, business finances, and retirement plans.
Due to a lack of financial planning and management, many individuals must undergo severe stress when a financial crisis hits them.
This severity has only manifested with the onset of the pandemic when many people realized their lack of financial literacy.
The changing landscape of the job market and the global economy have highlighted how financial planning is crucial in our lives today.
So, if you are a beginner and want to learn how to plan your finances, these nine tips should help.
1. Ascertain your current financial health
It is important to have a clear idea of your financial health. Your credit score tells you whether or not you are in the good books with your bank.
It also helps you to know your current financial standing. You can check it by visiting one of the many websites that offer free credit score checks.
If you're looking for long-term plans, then it is important that you create a budget and get an estimate of how much money you spend on expenses every month.
This will help you plan better for the future and ensure that your finances are secure and stable in the long term.
There are many ways that you can figure out where you stand financially:
- Checking your credit score
- Figuring out how much money you make
- Figuring out how much money goes in and goes out each month
- Creating a budget
- Estimating the long-term plans that will affect your finances
2. Set financial goals & watch out for the common mistakes
Financial goals are not just about money. They are about ensuring financial security and financial stability.
Setting financial goals is the first step to achieving your financial stability.
Here are some tips for how to plan your finances so that you can reach your long-term financial goals:
- Create a budget
- Understand the difference between wants and needs
- Set up a savings account
- Get rid of unnecessary debt
- Do not overspend
Watch out for these common mistakes when setting financial goals
- Setting goals that are too high and making them seem easy to reach
- Not setting any goals at all.
- Setting goals in a rush just because others are doing.
Think about what you want to achieve in the next 10, 20, or 30 years. Consider where you want your money to go and how it will help you reach that goal.
3. Prioritize important financial goals
Financial goals are not always the same for everyone. When you are in your 20s and 30s, it is easier to prioritize your financial goals.
You may feel secure with a job and don't have many expenses.
However, as you get older, this changes. You will want to ensure you save for retirement, pay off debt, and build an emergency fund.
To prioritize your financial goals, it is essential to know what they are and prioritize them accordingly.
Take help from your trusted financial advisor to help you through this process. They can help you save and invest your money to achieve those goals.
4. Start saving and investing money early on
Saving and investing is not a walk in the park. It takes a lot of research and knowledge. A good financial advisor can guide you through your financial life.
These are the greatest and safest way to invest in stocks, bonds, and other securities for beginners.
The risk of losing money in a mutual fund is significantly lower than in other asset classes.
Since the fund is managed by a team of professional managers who usually represent the interests of many investors, consider holding onto them in the long-term to reap the benefits of compound interests.
If you are not one for taking any risks with your money and are content with low interest, bank fixed deposits are good options.
The only stipulation with FDs is that you cannot invest for more than 5 years.
Post Office savings schemes
The Indian post office offers many lucrative low-risk savings schemes which offer income tax exemptions.
Some of them are Sukanya Samriddhi Yojana, Kisan Vikas Patra, National Pension Scheme, Monthly Income Scheme, etc.
Real Estate Investment Trust, in short REIT, is an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns.
It is one of the best investment asset classes for investors who want to build wealth steadily over the years.
Digital gold offers the benefits of investing in physical gold without security issues.
It is another lucrative investment option that has been increasing in popularity lately.
One of the best ways to invest in digital gold is by saving daily with the Jar app.
It is a micro-savings app that allows you to save as low as ₹10/day or ₹5,000/month. The power is in your hands.
The Jar app scans through your SMS folder to detect your online purchases' payments.
The app automatically deducts the difference from your bank account using UPI to invest in 99.9% pure digital gold through Safegold.
It then rounds off the amount nearest to 10 and generates a spare change for your expenses.
Short Term Plans
You can consider parking some funds in liquid or short-term debt mutual funds if you wish to achieve your goals in the next 3-5 years or less.
5. Keep emergency fund ready
Always have an emergency fund of around six months' worth of living expenses if something happens.
This way, you don't need to worry about paying your bills or having enough food on the table when you lose your job or suffer a medical emergency!
Deviate some of your savings towards your emergency funds and immune yourself from any adverse financial situations.
It can seem like a tough nut to crack, but our blog on 5 hacks to build an iron-clad emergency fund can make this process easy for you.
6. Stay away from credit card debt
You can avoid many problems and unnecessary stress by avoiding credit card debt. While it's true that credit cards offer many rewards, discounts, and cashbacks.
But irresponsible use of credit cards, such as maxing out, impulsive shopping, missing out on bill payments, and paying only the minimum amount due, can eventually drive you into the debt trap.
As a result, your credit score may drop and affect your loan eligibility.
Try to reduce your debt bargain. You can:
- Convert your outstanding balance into EMI to pay back in small amounts.
- Get a secured loan to clear your outstanding bill.
- Use a debit card, cash, or UPI for daily necessities and small purchases.
- Don't hesitate to tap into your emergency fund for unexpected costs
- Avoid using credit cards as much as possible.
Also Read: 5 Tips To Be Free of Credit Card Debt
7. Consider tax planning
As an Indian citizen, you must pay income tax and file GST if you have a business.
But, under Income Tax Act 1961, you get many areas where you can save money from paying taxes.
So, to avail of those facilities, appropriate tax planning is necessary.
You must make smart moves and make the right investments, which will help save taxes, but at the same time don't put all eggs in one basket.
Diversify your investments across multiple asset classes to reduce risk.
Read our blog to know all the changes in Income Tax rules for 2022-23.
8. Plan your retirement
Retirement planning in your 20s may sound like an exaggeration, but trust us when we say the earlier you start, the bigger your retirement fund will be.
Take charge of your personal finance planning and money management today because no one will give you a loan for retirement.
Investing in mutual funds, PPF, and NPS until you hit 60 can assure you to retire rich with crores of rupees in your bank account.
So, manage your money carefully. Every penny you save today will be gold for you in your old age.
9. Get insured
When you are hit by life's rainy days, you should have a readily-available emergency fund.
Insurance policies can also help you in this regard. There are three key types of insurance:
Term Insurance: It is where you can make your and your family's life secure in case you die or meet with an accident. This is one of the most affordable and sought-after insurance policies.
Health Insurance: Your health insurance is like protection gear. If you fall sick and don't have liquid cash readily available, health insurance can help.
ULIP: Earn money while protecting your family. This type of life insurance offers equity income, tax-savings facility, and life cover.
Financial planning is a critical process that you should not ignore. It is best to start early to make the most of your money.
Financial planning for beginners can seem like climbing Everest, but with the right guide, the path becomes smoother.
The bottom line is that you must have an honest conversation with yourself about where you are financially today and what you want to achieve for your future, and then start planning from there.