While most people claim to know it all about planning and managing their finances, it is important to understand what is financial planning. Financial Planning is a process of making sensible decisions about your money which can help you achieve your goals in life. It is not merely about buying investment products or assets but creating a financial plan and sticking to it. You put in a lot of hard work to earn your money and therefore, you need a solid financial plan to optimally spend and/or invest it. Today, we will look at the world of financial planning and try to understand how you can get it to work for yourself.
How does Financial Planning work?
Let’s go over some important aspects of financial planning to help you understand it better and create a comprehensive financial plan for yourself.
Defining Achievable Financial Goals
Every plan needs an objective, including a financial plan. Before creating a plan, it is important that you spend some time defining your financial goals. In other words, what do you want to do with your money? This will help you create a plan to help achieve those goals or dreams. Some examples of financial goals are:
- Creating a nest egg for retirement
- Saving up funds to buy a dream home
- Creating an education fund for the children
- Getting yourself to a debt-free life, etc.
It is important that you stay realistic while defining your goals. Know the earning, spending limitations and then plan accordingly. Living in a sea-facing bungalow can be a dream of most sea-lovers, affordability is an aspect that one should not ignore.
After you have successfully defined achievable financial goals, you can get down to working out the approach to accomplish them.
Once you have a goal/goals in place, it’s time to start looking at your current income and expenditure sources. Remember, accomplishing a financial goal needs surplus finances. Therefore, creating a budget is extremely important for the success of any financial plan. A budget will allow you to assess your expenses and compare it with your earnings.
Many people tend to view budgeting as a hindrance in living their lives. However, the reality is that a budget gives you better control over your finances and allows you to spend on things that matter while refraining from impulsive purchases and overspending.
A Penny Saved is a Penny Earned
So, by now you have defined financial goals and a budget in place. This allows you to pinpoint areas where you can cut your expenses and redirect your funds to more important uses. The best way of going about this is creating a few lists:
- Create a list of necessary and unavoidable expenses in your regular life. These can include rent, instalments, taxes, etc. – expenses which you have no control over.
- Next, create a list of expenses which cannot be avoided but you can manage to curtail the expenses to a certain extent. Some such expenses are groceries, utilities, etc.
- Finally, make a list of all avoidable expenses like vacations, shopping (for recreation), entertainment, etc. While these are desirable, they are not necessary. You can successfully cut these costs without threatening your survival.
These lists will give you a clear picture of your expenses and allow you to make cost-cutting decisions efficiently. These steps can free up some amount of your cash flow which can be used to fulfil your financial objectives.
Also Read: The importance of saving and investment
Be Prepared for a Rainy Day
After you have determined the cost-cuts, you need to focus on creating an emergency fund. When you start saving and investing, it is important that you don’t dip into your savings funds during emergencies. Therefore, it is important that you create a small corpus of funds (liquid cash) to manage unplanned expenses or income disruptions. Usually, people keep an emergency fund sufficient enough to cover around 3-6 months of living expenses.
We understand that it might not be possible to clear all debts, especially large debts like home loans. However, the most important aspect of becoming financially secure is trying to get yourself out of all debts, if possible. You can start by targeting and paying off your smallest debt first and work your way up. Also, focus on the highest interest charging debts like credit cards on priority. Clearing debts help you feel more in control of your finances, increases your monthly cash flow, and allows you to work towards your goals.
Also Read: Is investing a good idea while in debt?
Insurance is a fundamental part of financial planning
Despite having an emergency fund and sizeable savings, there are many contingencies in life that one cannot plan for. This is where insurance steps in. You can choose one or more insurance plans depending on your needs. Some options are life insurance, vehicle insurance, health insurance, home insurance, etc. It ensures that your finances don’t take a hit in the event of an unplanned exigency.
Review at least once every year
After you put your financial plan in place and start working towards accomplishing your goals, ensure that you revisit your plan and review it at least once every year. Over a period of time, things can change. You might experience an increase in income or expenses or relocate to a costlier/cheaper city. Your financial plan needs to take into consideration all relevant aspects of your life for it to be fruitful. Reviewing it once a year allows you to keep it recent.
Before we end the article, remember, you put in a lot of hard work to earn money. Therefore, you should be prudent and careful before spending it. Investing can help you ensure a financially independent life for you and your family and financial planning allows you to approach it methodically and strategically. Talk to an investment advisor and create your financial plan today!