Financial Planning may seem to be a method only top organisation and wealthy people follow. However, everyone of us has done some sort of financial planning. Have you knotted two ends of debit and credit before your payday? That’s an elementary form of financial planning.
“Planning is not foreseeing the exact future, but being prepared for it.”
Financial Planning has more than one definition, in simple words it is a process of identifying various opportunities to earn, save and optimize your spending. It also highlights the amount one should earn, invest and spend to meet their financial goals.
We all have our wish list that we want to be fulfilled in future and without a proper financial planning those wish list becomes a hard nut to crack.
Planning your finances will not make you filthy rich overnight but if you practice it continuously this will reduce your financial stress, support your current needs and build a nest for your retirement.
Analyzing your current financial condition is the foundation stone of financial planning. It is always recommended to hire a professional financial advisor to assess your financial condition. As you may be impartial to do it on your own.
Hiring a professional finance advisor, shall get you an overview of how to accommodate your financial requirement. However, in long run you need not to be solely dependent on them. Proactively you should build a similar strategy that is solution based on your financial appetite and future objective.
Now let’s dive right in and discuss on the tips which will make your financial planning concreate against the ups and downs of finances.
Develop the habit of saving/investing:
List full of expenses announcing their arrival at start of each month? Is saving money is nearly impossible? This indicates you have an unhealthy saving habit.
Saving money may seem tuff and spending money seems very easy when there is absence of a goal. You might want to save money, but there is no purpose for the money. It’s tough to stay inspired when you have no strong purpose for the saved money.
Financial advisors recommended to create achievable goals which gives purpose to your savings, weather you save for your vacation or your emergency fund. You can simply start by setting up automated savings or investments directly from your salary account. This will help you build habit of saving.
You should always remember, just because you can afford something does not mean you need it. Cutting off needless expenses to savings is not enough also you need to negotiate the cost or find cost-effective alternatives for your expenses.
When you get hike in your monthly play slip, try not to increase your expenses instead try living at a set income level and add the surplus amount to your investments. This allows your saving funds to grow which will indeed help you offset any downturns or emergency expenses.
Manage your debt wisely:
There’s nothing incorrect with using credit card or taking debt. You may utilize the debt for your needs, security, or to make a major buying like a land, house, automobile, or your education. The point is that you should manage your debt very wisely so that you do not get caught up with high-interest payments or charges.
Financial advisor strictly that your debt should not be more than 20% of your net income. By debt we refer to your credit card payments, car loans, student loans and any other debts that you repay monthly, and debt is not the amount you spend on your rent or grocery or mortgage.
Paying minimum due amount for your credit card may seem very attractive, but you should never opt until you do not have funds to clear the total due amount. To pay your dues consistently, take a good look at your spending habits and analyses what tunings can be done to your income or expenses to free up some funds.
Recommend strategy towards your debt is to clear the loans or debts which have lower principle amount left. Also simultaneously pay the minimum dues of other debts focusing more on the debts with lower balance. This will help you get rid of mental clutter of having multiple loans.
Plan your taxes
Want to pay the minimum about towards your tax? You need to start tax planning. Do not worry it does not require any accounting diploma or degree to plan your tax, a little planning is enough.
At the end of financial year, we mostly receive ample number of phone calls from insurance companies that insist you to purchase an insurance policy that will help you save tax amount. This is not recommended and it is not the wisest things to do.
Planning your tax at the end of financial year will not allow you to choose the right investment or scheme. Right time to plan your taxes is at the beginning of financial year.
Tax planning will help you to invest in attractive schemes which will offer your growth in funds as well as reduction of tax amount paid to the tax authority.
Tax planning is very simple for the salaried employees. Do not worry it does not have any cash outflow. All you require to do is restructure your salary by adding the components such as transport allowance, Medical expenses, Food coupons, House rent allowance and leave travel allowance.
Procrastination is the root cause of paying extra tax each year. In India the most preferred tax saving invest is Public provident funds, in fact now you can create your PPF account online directly from your net banking.
Keep an Emergency Fund
Contingency occurs, a sudden recession blowing away your job, medical bills not covered by your health policy, home repair, etc. you would have not got an idea why professional financial advisors emphasis so much on emergency fund while planning your finance.
Emergency fund is not collected overnight, you should save the funds gradually. From your monthly paycheck set aside a few percent of funds in a separate saving account. You don’t have to think about it, or go back to it unless there is an emergency need.
Thumb rule of emergency fund is that it should be highly liquid and you should be able to withdraw the money quickly, easily and without any charges or penalty.
Financial advisors strictly recommend not to invest your emergency funds in Stocks, as they are highly volatile and you would have to sell the stock at very low price to quickly get your emergency funds.
You should plan your emergency fund in such a way that is should take care of your living and other significant expenses such as school fees, house rent, health care and paying your due installment for at least a period of 3 to 4 months.
Emergency fund is a double-sided sword, if you have kept liquid funds kept aside for emergency purpose then it will yield very less interest and if you never saved emergency than you will expose yourself to potential risk.
Plan for retirement
Retirement should be your best and stress-free time in your life, after years of hard work you should be reaping benefits from what you have earned. To achieve this, you should start financial planning for the time of your retirement.
Whether your retirement is very near or years away, you are most likely not giving it a thought what will happen once you retire and stop getting monthly paychecks. Also, there are many among us, who have long crossed retiring age but still are unable to retire due to financial circumstances.
It is essential that you give yourself best chance for a secure future. Even if you have not started planning for your retirement, you can start it right away. Retirement planning will give you freedom to decide how and when you will get retired.
You should know the difference between “Seizing the day” and “Saving for future”. Financial advisors often point out the fact that you will tend to spend less money after retirement than you are spending while earning money.
However, trying new hobby or taking extra-long vacation might cause your monthly bills skyrocketing. Before trying such, you need to differentiate between your needs and wants.
Retirement funds should be pooled in long-term investment options, by which your funds will accumulate and grow over time and leaving you with a considerable fund to achieve your retirement dreams.
I hope these tips will be invaluable for you to start and develop your financial planning. Do let us know your thoughts in comment section.
About the author:
Khalid Ahmad is an MBA and finance enthusiast with 10 years as a financial consultant and a passionate blogger, running the personal finance blog Easytechbank.com. He shares knowledge and simplifies things in the field of finance and investment for the common people.