Financial planning is not just a driven process, it is actually a basic need for every individual and his/ her family. It is a complete cycle starting from monthly budget to retirement planning.
The process comprises Budgeting, Insurance, Goal-Based Investments, Getting out of Debt, and Retirement. If you miss any of these steps, the cycle will be incomplete.
There are many financial planners (experts) rolling out in the finance industry and social media. Though, through this article, I aim to compel you to think about changing yourself on your habits towards financial freedom.
Let us, deep dive, into the steps one by one.
Monthly Budgeting:
Financial planning will be nothing without the first step which is the monthly budget. A survey says many people don’t know their average monthly expenditure. So, if you fall under this case, please try to improve yourself and maintain a monthly budget.
The budget should be prepared in a notebook or a diary. As you manually write in a notebook, it imbibes your brain and keeps reminding you of where you spend more. When you identify the area where most of your expenses are parked, just find all the ways to cut them off.
Identify and categorize your expenses into three categories. They are,
- Needs
- Wants
- Savings
Needs are the expenses which we do on necessary goods or products, without which we can’t live.
Wants are the type of expenses, which doesn’t impact your life, if not spent or bought into.
Savings are deposits or investments of a definite proportion of monthly income to achieve financial goals or needs of later part of life.
Astute financial planning should be spending only on needs and saving 30-50% of total monthly income.
Insurance for Family:
The moment we said Insurance, your mind would move towards the Insurance plan which our neighbor or relatives force us to take. These are not real insurance plans. These are endowments of cashback plans.
There is a difference between Investment and Insurance. Insurance is a type of protection for the family. When a key person of the family doesn’t exist, the family will be provided with financial support, if the key person had availed an insurance in the first place.
Investment is an attempt to allocate a part of monthly income to meet our future endeavors by surpassing the inflation rate.
So, please don’t confuse yourself with investment and Insurance. These endowment and cashback policies are not real insurance.
You have to focus only on two types of Insurance.
- Pure Term Insurance.
- Family Health Insurance.
As we mentioned earlier, Insurance is a token of safety parameter setting for our family’s protection by the head of the family.
Close all your Debts:
Debts are the real traps of financial planning. Unless you close all your debts, your earnings are really a waste. You will be running all over the day and night to pay the monthly EMI.
This starts when we live above our means. The current banking and finance system is ready to pay any amount to an salaried employee.
The trap starts with the issuance of Credit Card and Zero percentage EMI offers.
Middle-class people have often accused of living for showing-off (and maybe try and match the lifestyle of higher-middle-class income earning families).
To resolve this, go back to Step 1; Yes – budgeting is the only solution to close all your debts.
Find out where majority of your expenses are spent – Needs or wants? If you have a monthly payout for Wants, then cut them down completely. Focus on closing the debt by the amount you have saved from Wants.
- If you have Credit Cards, repay them quickly. As it has a higher interest rate ranging from 24-60% per annum (post the due date).
- Second, close all your personal loans, gold loans, etc.
- If you have a Home Loan and it’s EMI is the same as the Rent you paid, don’t rejig it. If it is higher than the rent, then you have a decision to make.
- The foremost is, please avoid adding any new debt to your portfolio.
- Don’t get attracted by 0% EMI, Easy EMI, etc. Avoid offers as much as you can.
Goal-Based Investment:
This is the most vital part of financial planning. Once you start saving, it has to yield some return. You should be aware of what is meant by Inflation?
Rs. 100 in 1960 is just Rs. 2 in 2020. This is what inflation is. If your money doesn’t grow, it will be beaten by inflation and hold lower value over the years.
So, you have to invest your savings in any materials which can produce a return that beats inflation in long run. In the meanwhile, you should understand, why you are investing?
Investing without a goal will not get you anywhere. So, you should learn about Goal-Based Investment.
Goals are the real fuel for Investments. You will be having a reason to sacrifice today’s enjoyments and to make many decades joyful.
There are many investment firms available starting from a bank savings account, post office savings, Fixed Income components, Bonds, Debt funds, Mutual Funds, Gold, Real Estate, and Shares.
It is not necessary to invest in high yielding material, rather, investing according to goals is most important.
Retirement Planning:
The best and final part of financial planning is the retirement plan. Most often, people forget to do this as half of their life vanishes in paying the EMI and debts.
We all have the thought that burdens and increases responsibilities of your children, that they have to take care of you. This is a flawed concept and you would be better off to erase these terminologies from your mind.
It is your duty to save a minimum of 10% of your monthly income from the day you start your career. Invest these amounts in the Index fund for 20-30 years and add 10% extra every year. So, while you retire, you could even have a corpus of nearly ~INR 5 Crores.
Conclusion:
Hope the article would be an eye opener on financial planning and the steps to achieve a complete plan. Plan accordingly and make sure you start monthly budgeting.
Followed by insuring your family, closing all your debts, Goal-based investing and investing for retirement.
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