Financial planning is the process, which provides you a framework for achieving your life goals in a systematic and planned way by avoiding shocks and surprises. It comes with objectives, such as determining capital requirements, framing financial policies, and ensuring that the scarce financial resources are utilized the best possible way.
Instilling the habit of financial planning in young adults is a tough job. However, when they volunteer to plan their finances, one wouldn’t know where and how to begin. Here are 10 golden rules that one must follow to plan their finances well.
Here are the 10 Best financial tips that you need to know
1. Manage your Money
Managing one’s money need not be boring. It’s not rocket science and you need not be from a financial background. You only need to show a bit of commitment.
Deciding to save is the first step towards money management. Saving money can be a powerful step towards greater financial independence. Imagine borrowing from a friend for that urgent visit to the doctor!
In case you don’t have any friends, you might have to swipe your credit card. And you know credit card is the most expensive form of debt. Repeat this a few more times and you end up in a debt trap even before you realize that.
You may have many financial goals in your mind. Like buying a vehicle or the latest smartphone or wealth accumulation. In all these situations, you need money. But where will it come from? You got to have savings!
Saving money helps you avoid falling into debt traps. Not only this, but systematic saving on a regular basis can make you rich. You may achieve your financial goals in a timely manner. Now you might be wondering how to save? And even more important how much to save? As soon as you get your salary, start putting it under various heads. These heads can be expenses, EMIs, investments, and savings.
Ensure that you save a minimum of 10% of your income every month. It can be that simple! But don’t put it in a piggy bank. Idle money in a piggy bank doesn’t grow. Even the saving bank account may not fetch higher returns.
Instead, you may invest this amount in a liquid fund. A liquid fund is a type of debt mutual fund which invests money in fixed-income generating instruments like FDs, commercial paper, certificate of deposit, etc. around 4%. Invest your savings every month over the long term and see the magic it can do for you!
2.Regulate your expenses wisely
If you are living paycheck to paycheck and finding yourself struggling for money even before the month ends, then chances are you are living way beyond your means. Maybe there are a lot of unplanned expenses! These might be leaving you with no money for the necessities. But there’s a way out of this.
Try preparing a budget. Unless you have a budget, you won’t be able to control your cash flows. A budget simply shows how much money you have coming in and how those funds are spent.
Start by categorizing your expenses into fixed and variable; urgent and non-urgent; necessities and luxury; avoidable and unavoidable. In this way, you will create a full inventory of expenses in front of you. The more you convert things from abstract to physical, the better you will get a hold of them.
You can create a hierarchy of needs and decide which ones to address first. It’s all about prioritizing. You need to accept that you have got limited resources and unlimited wants. But you have to manage your resources. The sooner you accept this fact, the better you can control your impulses towards avoidable expenditure.
After addressing all necessary expenses, you can allocate some money towards entertainment and leisure. To avoid overspending, you can create a list of groceries before visiting the departmental store. You can also assign a no-spend day in the week.
Make sure you commit to your budget. Consider it as a commitment instead of a burden and stick to the boundaries.
3.Maintain a personal balance sheet
Having a personal balance sheet helps to know what you own and what you owe! It’s a pretty powerful tool to take your finances to the next level. It’s a statement wherein you can jot down your assets and liabilities. The difference between your assets and liabilities shows your personal net worth.
Before getting started, pull together your bank statements and other proofs of the liabilities. Then, list down your assets like the bank balance, investments, home value, and value of other assets. Take a sum of all the assets to arrive at the total value of your assets.
Further, list down your liabilities like the car loan, home loan, credit card balances and remaining balances in other loans. The sum of all the liabilities will show the value of the money you owe.
4. Create an Emergency Fund
A lot of people save up money and think that is the end of financial management. However, money management requires a little more than simply saving money. The first step is, of course, saving money but post that you need to set aside a separate emergency fund. You see your savings are for you to use in case you need to pay for a well thought out lifestyle expense like your first car or maybe even to put some cash down for your first home. The emergency fund, however, is for real crisis situations such as medical emergencies, loss of a job or even a recession. Make sure you create a separate fund for this – it could even be a Fixed Deposit to ensure you aren’t tempted to touch it outside of emergency situations.
5.Automate Your Investments
Parting with your hard-earned money is hard – even if it is for your own good. This is why most people fail to invest regularly and inconsistent investments can often be the worst kinds of investments. You need to invest regularly to grow your wealth and a wealth management app like Cube Wealth can help you with that. The best part is it’s free and gives you the benefits of a scientifically sound, data-driven app along with human advisors who will guide you through the tough decisions. Once you automate your investments with the Cube Wealth app you can invest worry-free and do nothing except track your investment every few months.
6.Set Financial Goals
Money is useless unless spent the right way. That’s why it’s important for you to set financial goals for yourself. What do you want to do with your money? How do you plan to spend it? Knowing these things is extremely important otherwise all the effort you’re putting into financial management will become pointless. Decide whether you are saving for a holiday, new gadgets, a new investment etc. Set a goal and then work towards it consistently using an app such as Cube Wealth.
7.Get your risks covered
Human life and property are vulnerable to risks. These risks can lead to loss of income and put you and your dependents in a financial jeopardy. Similar to investing for wealth accumulation, ensure wealth preservation through insurance.
Buying a ULIP is not all. You end up paying more and remain inadequately insured. Instead of this, a term insurance plan will be a wiser proposition to buy. Term insurance plan provides you higher risk coverage at a reasonable price.
Don’t expect returns from your life insurance policy. Ideally, the sum assured needs to be at least 10 times your annual income. Before buying life insurance, you can compare policies online to select the one which satisfies your requirement at affordable prices.
Apart from life insurance, you may need health insurance as well. It will enable you to access high-quality healthcare at reasonable prices. Don’t end up shelling out more for less.
8.Use Cash Instead of Plastic Money
Credit cards and debit cards can lead a lot of people into spending much more than they would otherwise. The thing is, when you swipe a card you are disconnected from the actual experience of spending your hard-earned money. A few number change in your account summary but that doesn’t really have the impact it should. So do yourself a favour and only spend money using cash for your day to day over the head expenses such as eating out, drinking with friends, shopping for clothes etc.
9. Start Investing
Investing is one of the best ways to increase your net worth, but a lot of people stay away from it because they’re scared of losing money. So instead of investing, they keep their money in a savings account. That’s great, and you should have some money in a savings account for emergencies, but the truth is:
Money in a savings account loses value over time.
See, the average savings account has a very tiny 0.06% APY (annual percentage yield), while inflation is around 1.7%. That means that each year, the money you have in a savings account is going to have less and less buying power.
So, what can you invest in to stay ahead of inflation? Here are some options:
- Real estate
- Peer-to-peer lending
- Exchange traded funds (ETFs)
10.Contribute to a Retirement Plan
If your employer offers a 401(k) plan (or another type of employer-sponsored retirement savings program), you should consider contributing to it if you can afford to. Often, with 401(k) plans, your employer will contribute the same amount that you put toward your account up to a certain percent. This is often referred to as an “employer match.” If your employer doesn’t offer a retirement plan, consider an IRA.