Everything You Need to Know About Financial Planning
Updated on 24 Feb 2020
You hear the term ‘Financial Planning’ and you think excel sheets and long-drawn calculations. Good planning is the basis of making good investments, so let us break down the steps for you.
The steps for creating a solid financial plan are:
Introduction to Financial Planning
One of the biggest myths about financial planning is that it is only meant for people with lots of money. It is not true in any way as the amount of money you have has nothing to do with whether you should indulge in financial planning or not. Everyone has a dream scenario where they live their lives well, free of debt, and retire happily. In fact, financial planning is even more important for people with less money, as it helps you grow in a positive manner and multiply your money in a quick but systematic way.
A good financial plan will help you in other aspects of life as well, such as healthcare, education, housing, savings and investments and so on. Let us now delve into how to plan your finances in a way that will help you achieve all your financial dreams.
Focus on Budgeting
Budgeting is the first and foremost step you need to take to ensure a good start to your financial planning. The best way to start budgeting is by tracking your expenditure for a whole year. This way, you will be able to understand the outflow of your money, with respect to transportation expenses, monthly purchases, groceries, festive spends, EMIs, bills and so on. Simultaneously, you will get an idea about where all can you limit your expenses as well. Once you have all jotted down with you, it becomes a lot easier for you to make a budget for your expenses. Having this in your mind will help you track your financial progress.
Maintain a Contingency Reserve
Always have a contingency reserve with respect to the yearly budget you have. You should park an amount of money in your savings account that is equivalent to at least half of your budget, if not the complete yearly expenditure. You can never know how things can take a turn for the worse and hence is important for you to keep a reserve for such situations, where you are left with no money to work around.
Ensure You are Optimally Insured
One of the safest ways to ensure that you are optimally insured is by getting a life insurance cover that is at least 8-10 times that of your annual income. When it comes to health insurance, have a good healthcare cover of at least Rs 4-5 lakhs. To get the right number for your life insurance, you can calculate it through the human-life approach method that uses multiple factors to present you with the right number.
Pay Off High-Interest Debt First
If you have multiple debts or loans, the first thing you need to do is to pay off high-interest debt first, irrespective of the amount of money. Paying off high-interest debt will give leave you in peace, which is a crucial factor in financial planning since the mental well-being affects your decision-making skills as well. You first need to be debt-free and then start investing, before spending hugely.
List Down Your Financial Goals
Listing down your financial goals helps you understand the path you need to follow in your life, financially. The most effective way to do this is by following the method of S.M.A.R.T, which stands for Specific, Measurable, Adjustable, Realistic and Time-bound. Once you jot down your plans based on this approach, you further need to bifurcate them into short-term, medium-term and long-term goals.
Do Not Ignore Asset Allocation
One of the biggest mistakes most people do is to not allocate their finances and investments into different investment options. You need to identify your risk appetite, financial goals and investment time-frame to get a good idea about where to allocate your assets. In many ways, asset allocation is the foundation of financial planning.
Plan For Your Retirement
Planning your retirement the right way helps you go a long way in determining whether your post-retirement life would be stable or not. In fact, one can argue that it is the most important financial goal that you need to keep track of. The key here is to let your money work for you in this stage of life, instead of still working for money.
Review Your Financial Plan Regularly
Reviewing your financial plan is an incredibly crucial step in your financial planning process as here you take note of how your investments are working and if they are on track to help you achieve your financial goals. It includes the assessment of your investments as well. Moreover, one thing that most people forget about is to not factor in inflation. You should always keep inflation in mind, especially for your retirement financial goal, as the monthly expenses will not be the same two decades from now.
Keeping all these things in mind, you can easily start with your financial planning and achieve all your financial goals with ease. To get professional guidance, connect to Kristal, where you can consult professional financial planners to help you with your investments and the whole process in general.
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