Planning finances is an integral part of our day-to-day life. We need to plan finances that help to manage our expenses, savings, and investments.
There are instances, such as medical emergency, children higher education requires a huge corpus of money. With the absence of financial planning, it becomes quite tough for you to pay for such expenses.
Here comes the need for Financial Planning! By planning your finances, you can identify your financial goals and then, create a plan to achieve those goals.
What is Financial Planning?
Financial planning serves as a guide to meet your life’s financial goals. It is just like a roadmap that helps you meet both expected and unexpected expenses. It helps make a balance in your spending and make sure you will have enough money during a financial emergency.
But, you must be wondering how to start with Financial Planning.
7-step Guide to Financial Planning for Beginners
Here is a 7-step guide that will help manage your finances effectively. It is extremely useful for beginners who don’t have much expertise to deal with personal finances.
- Regulate your Expenses
- Set a Budget
- Identify your Financial Goals
- Pay off your Debt
- Create an Emergency Fund
- Insurance & Estate Planning
- Diversify Investments
Also Read: Golden Rules of Financial Planning
1. Regulate your Expenses
Keep track of your expenditures and check how & where you are spending your funds. It helps you understand your spending habits. For instance, if your monthly income is Rs 35,000 and you are spending Rs 38,000 (more than the earnings), it’s obvious you are falling into debt.
You need to put a check on over-spending, cut short the expenses, and save money that you can invest to meeting your financial goals. Investing money with a Recurring Deposit, Fixed Deposit, PPF, NPS, etc., helps you develop the discipline of savings and you can easily get the monthly savings. These are low-risk investment options that give decent returns as well.
2. Set a Budget
When it comes to creating a financial plan, setting a monthly budget is a key step. Putting a budget helps control your spending, especially over-spending habits. When you make a budget, make sure to stick to it. Setting a budget helps you set the financial goals and invest to meet those goals.
3. Identify your Financial Goals
It’s never early to begin with financial planning. As soon as you start earning, you must go ahead in planning your finances. The first aspect is to establish your financial goals such as children’s education, want to purchase a house, traveling abroad, going on a dream vacation with family, retirement planning, etc. Having a specific set of financial goals helps you identify what you want to achieve and you can create a financial plan accordingly.
Also Read: 5 Money Lessons to Learn from COVID-19 Crisis
4. Pay off your Debt
If you have taken a car loan, home loan, or any other debt, you must pay it off in regular installments. Not paying the debt timely will not only attract penalty payments, but it will also make the credit score down.
(Note: Loan providers usually prefer applicants having a high credit score to sanction the loan applications.)
You must include repayment of debt in your financial planning and make sure to repay the debt as quickly as possible.
5. Create an Emergency Fund
Emergencies like a severe accident, hospitalization, job loss, can create a financially distressed situation. To cope up with this, you are advised to build an emergency fund that can fund your family’s expenses for at least 8 to 12 months. It helps you pay for bills, EMIs and other monthly expenses.
6. Insurance & Estate Planning
Considering the uncertainties in life, you must plan to buy insurance that ensures the financial security of your family. Getting adequate life and health insurance coverage ensures financial guard against emergencies that may arise due to the uncertainties of life.
Estate planning helps to transfer assets to your loved ones, after your unfortunate demise. You can take legal assistance to get this done. Both insurance & estate planning must be included in an effective financial plan.
7. Diversify Investments
When you are investing to meet financial goals, you are advised to allocate your funds to various investments such as equity, mutual funds, PPF, NPS, fixed/ recurring deposits, etc. Depending on your risk-taking capacity, you can choose to invest in different assets to obtain high returns. Also, you need to ensure that the investment assets you choose must enable you to achieve your financial goals.
Also Read: 10 Steps of Successful Financial Planning
After reading this 7-step guide, you must have understood the key aspects of financial planning. You only need to establish your key financial goals and make investments wisely to make sure you can achieve those goals. Also read our Thumb Rules of Personal Financial Planning that will give a direction to start planning finances.