“If you fail to plan, you plan to fail.”
With this quote in mind, I recently decided to start building a financial plan to secure my future.
After a simple Google search, I came to a realization – so many people talked about various rules of financial planning, but no one talked about the importance of having a direction in our plan.
Financial planning is a framework that will help us achieve our financial goals in a timely manner. To be successful, our plan requires a flow that is in sync with our goals and aspirations.
To efficiently plan our finances, we need to do it in the following order –
- We need to build up our savings which we can utilize for our investments.
- We need to protect ourselves from financial setbacks and obstacles.
- We need to use our surplus money to invest and grow our wealth.
In this article, we will be discussing the seven golden rules of financial planning for beginners, keeping in mind the three phases mentioned above.
Savings
1. Start making a budget.
A budget is a plan of action that helps us allocate our income towards our savings, expenses and debt repayments.
Making a monthly budget is the best way to keep track of your expenses and obligations. It can also help you cut down on unnecessary expenses and build your savings.
There are two ways to make a budget – you can either do it yourself or use an app to assist you.
2. Plan your taxes wisely.
Many of us might ignore it at first, but tax planning is just as important as every other step in financial planning.
To plan your taxes wisely,
- Understand how taxation in India works and what income slabs and deductions are relevant to you;
- Plan for your tax payments when you are building your budget; and
- Try to include tax-saving products; if in India, consider ELSS (Equity-Linked Savings Scheme) mutual funds in your investments.
Protection
3. Build an Emergency Fund.
Before we begin to make investments, it’s essential that we keep aside some money that we can use to deal with unforeseen events like medical issues.
This amount is known as an emergency fund. This fund should have an amount that equals somewhere between 3-6 months of your income.
To build this fund, you can follow these steps –
- Decide upon a fixed amount that you want to keep in this fund.
- Set aside a fixed amount from your income on a monthly basis in a separate bank account or investment.
4. Manage your debt.
Without having a plan of action, it can become very hard for us to pay off our loans. Poor debt management can lead to more debt and even bankruptcy in the worst case.
With a monthly budget, be sure to provide for your debt obligations before anything else.
Always remember to look for the lowest interest options while taking a loan. You can even transfer your loan to another bank to reduce your obligation.
You can also take the help of a financial planner who can assist you in making a plan to manage your debt.
5. Cover your risks with insurance.
The biggest risk we need to deal with is the risk of the loss of life. We can do this by getting the proper insurance plan for ourselves and our family members.
When it comes to a term plan of life insurance, the amount of insurance you have should be at least ten times your annual income.
Also, you should consider getting health insurance to protect yourself from the high costs of hospital treatments.
Investments
Now that you have saved your money and protected yourself from possible risks, let us move ahead to building wealth with investments.
6. Plan and invest as early as possible.
Considering inflation, it’s common knowledge that things will just keep getting more expensive as the years pass by.
Therefore, to grow your wealth and beat inflation rates, you need to start investing as early as possible to take advantage of the power of compounding.
The earlier you start your investment, the lesser money you’ll have to invest regularly. You can check this with the online investment calculators available for free.
You already know what your financial goals are – buying a house, retiring at 65, yearly vacations.
To grow the wealth you need to achieve these goals, you should first categorize these goals as short-term and long-term. This will help you have a clearer view of your goals.
After this, you should invest in products which will bring you closer to your goals. This is what we’ll discuss in our final rule.
7. Create a diversified portfolio.
Investing includes the creation of a portfolio that has assets that are in line with your goals.
To do this, you can follow these steps –
- Try to determine your risk appetite – how much money you’re willing to risk in investments.
- Explore the different assets based on your risk appetite.
- Choose a basket of different securities to minimize your overall risk.
The process in step 3 is known as diversification.
Once you have made your portfolio, remember to monitor it on a regular basis and shuffle the assets inside it to ensure that your goals are being achieved.
With a direction, financial planning will bear more benefits to us. The rules mentioned as per the three phases can make our journey towards financial security easier and smoother.
