Financial planning is a crucial aspect of life that often gets overlooked, especially by beginners. It is a fundamental skill that serves as the cornerstone of financial stability and success. In this article, we’ll break down the concept of financial planning for beginners. By educating yourself about the fundamental aspects involved in the process of financial planning, you can gain control over your finances and start working towards a more secure and prosperous future.
Financial Plan for beginners
At first, financial planning could seem like an intimidating task, but it’s very crucial for one’s secure future. It involves understanding your expenses, setting a budget, defining personal goals, saving money, creating an emergency fund, and avoiding debts.
So, let’s dive right into these aspects that will make financial planning for young adults easier!
Understand Your Expenses
It’s essential to have a clear grasp of where your money is being spent. To do this, start by tracking all your expenses over a month or two. This will help you identify your spending patterns. Using apps and spreadsheets makes this task easy to manage. Next, you should be able to differentiate between wants and needs. So after tracking your spending, categorise your expenses into essential and non-essential categories. Essential expenses are those you cannot do without, like food and rent/mortgage, while non-essential expenses are discretionary, such as going out or entertainment. By tracking and categorising your expenses, you will be able to pinpoint areas where you can make cuts. This might mean not going out to eat as often, finding cheaper alternatives for entertainment, or negotiating better rates for your essential expenses.
Set A Budget
Now that you have a clearer picture of your expenses and have identified areas to cut back, it’s time to create a monthly budget. A budget serves as a financial roadmap, helping you allocate your income effectively to meet your financial goals. Create a budget that outlines your monthly income and expenses.It should ensure that your expenses are less than your income, leaving room for savings. Creating a budget is only half the battle – sticking to it is equally important. It is key to effective financial planning. You can utilise budgeting tools or apps to help you track your spending and stay on target.
Remember that your budget should be realistic and flexible. It’s not a rigid set of rules. Circumstances can change which may not allow you to stick to your budget religiously, in which case it is essential to be flexible. Periodically review your budget to ensure you’re staying on track and make adjustments as needed.
Set Personal Goals
Having clear financial goals in mind gives financial planning more meaning. These goals could be short-term, such as saving Rs. 50,000 for a vacation next year, or they could be long term, like funding your child’s education.
SMART Goals: Make your goals SMART – Specific, Measurable, Achievable, Relevant, and Time-bound. For example, don’t say, “I’m going to save money,” say “I’m going to save Rs. 10,00,000 for a down payment on a house in four years time.” This specifies clearly that the goal is to save money for a house, how much money needs to be saved, and by when you need that money.
One has multiple financial goals in life. It’s important to save for retirement, but for a person in their twenties, it’s more important to, say, save for their child’s education or to save for a house. So it is important to prioritise your goals based on their importance and feasibility. Your plan should outline how you will achieve each goal, including how much you need to save and by when.
You should look at saving money as more than just setting aside wherever income is left at the end of the month. It should be a conscious, very deliberate act. Even if you start small, aim to save a percentage of your income each month. You can increase the amount you save as your income grows.
A savings account can be used to separate your savings from your everyday spending.You can set up automatic transfers to ensure that you save consistently, even before you have the chance to spend your money.
Over time, your savings will accumulate, providing you with opportunities for investment in stocks, bonds, or mutual funds.
Create An Emergency Fund
Life is full of uncertainties, and expenses can crop up unexpectedly. Whether it’s a natural disaster necessitating costly home repairs or a sudden job loss that impacts your income, or an unexpected medical emergency, financial surprises are a part of life. That’s where an emergency fund comes into the picture. An emergency fund is a kind of savings fund set aside specifically to cover such unexpected expenses.
Experts believe that one should save at least three to six months’ of expenses in an emergency fund. These funds help reduce stress by providing a financial safety net, preventing you from dipping into your savings or accumulating debt and ensuring that you will have the funds in case of unforeseen expenses.
Debt often serves as a substantial obstacle to achieving financial stability. While certain forms of debt, such as mortgages or student loans, may be considered investments in your future, others, like high-interest credit card debt, can be detrimental to your financial health. Accumulating interest over time can lead to significant financial burdens. Therefore, it is advised to steer clear of accumulating debt whenever possible.
Credit should be taken responsibly. Aim to pay off your credit cards each month. If you find yourself unable to avoid debt or already burdened by it, creating a structured debt repayment plan becomes crucial. To systematically address your debt, tailor repayment strategies to your situation. For example, prioritise paying off high-interest debts aggressively, even if it means reallocating funds from your budget for this purpose.
Also Read: Know About Financial Planning Objectives
Financial planning is a vital aspect of one’s life, particularly for beginners who are taking the first steps to take charge of their financial future. By understanding your expenses, setting a budget, establishing personal goals, saving money, creating an emergency fund, and avoiding debt, you can build a strong financial foundation that will serve you well in the years to come. While these steps are essential, it’s worth considering the valuable assistance of a financial planner to help you navigate this journey.
Financial planning is a dynamic process, and it’s essential to adapt and adjust your plan as your circumstances change. With dedication and discipline, you can achieve financial stability and work toward your financial dreams, and a financial planner can provide expert guidance and tailored strategies to make your path even more efficient and effective.