Financial planning restores sense of security in any individual. Almost everyone want to plan their finance wisely but only a few actually put some efforts to it. Here are some basics of financial planning to get you going
Define your goals
It’s important to know what’s your financial goal before you actually start planning. There can be different financial goals for different individuals. It can be children education or a new home. A holiday trip or a child’s wedding. If you know the final goal, you will be able to figure out the details as to how you will accomplish it.
Set up a budget
This step involves crunching numbers. You need to figure out how much do you need to achieve you goal. After that, you need to figure out how much do you earn each month and how much do you spend. This will give you an idea about your surplus funds. Out of these surplus funds, you have to achieve your goals. A good way to this is fill your form 12bb at the start of the year to have a clear picture of your budget.
Avoid unnecessary expenses
Once you have set up the budget, you will know where exactly is money going. Now you need to prioritise these expenses and list out the ones which are unnecessary. There is no simpler way to do this. What you need to do is prioritise the expenses like rents, school fees, household, electricity, fuel etc. Then you can leave out the expenses like eating out, movies, small vacation trips etc.
Create an emergency fund
You need to create a small emergency fund out of your savings. This will give you the extra cushion to handle unforeseen expenses. It will also help you to avoid any borrowings to meet such expenses.
Get out of debt
The simplest way to do this is by targeting smallest debt. Each time you repay a debt, it results into sense of accomplishment and increase in your monthly cash flow. So with this increase in cash flow, you can slowly and gradually get out of all your debts.
Save for retirement
Saving for retirement is the most important aspect of your financial planning. You should start your contributing towards your retirement at a very early age. No matter how small the monthly contribution is, the earlier the better. You should start with an amount which does not hurt your financial situation overall. If you get any lump sum amount like a policy maturity or tax refund, you should contribute the same towards retirement plan.
There are plenty of instruments which provide you steady returns with government security. You can open a PPF account with a bank and voluntarily deposit any amount from Rs. 500 to Rs. 1,50,000 in a year. You can also invest in Government’s National Pension Scheme (NPS) which is specifically designed and launched by Indian Government.
Have adequate insurance
Sometimes your savings may prove to be inadequate to deal with contingencies. Well in that case, having a proper insurance cover will save you from the additional financial pressure. There are different insurance covers like life insurance, medical insurance, vehicle insurance, business insurance if you are self employed etc.
Having an insurance will not help you avoid the contingencies but will enable you to deal with the additional financial burden due to such contingencies without affecting your existing financial situation. The trick is to assess the value of your financial assets and choose the insurance which the value of a particular asset. Because higher the value, higher the insurance premium.