Financial Planning for Beginners: A Comprehensive Guide

 

Financial planning is an essential part of everyone’s life, yet many people struggle to get started. It can be overwhelming to know where to begin, but with some basic knowledge, anyone can start planning for a financially sound future.

First of all there is no short cut for unusual high return on investments. Many a times people lose their money on investment in equity of fundamentally weak companies on the basis of some unrealistic tips or investment in unstable financial assets like cryptocurrencies. This should be avoided to protect your hard earned money. In reality wealth building is generally achieved through long term investment only.

An investor should have some basic knowledge and information about the market which will help him in taking better decision in financial planning, however engaging  professional financial advisors is also a good step for this purpose.  

i)  Set Goals

The first step in financial planning is to set goals. Identify your short-term, mid-term, and long-term financial goals. Short-term goals might include paying off credit card debt or saving for a vacation. Mid-term goals might include purchasing a new car or saving for a down payment on a home. Long-term goals might include retirement or saving for a child’s college education.

II) Create a Budget

Creating and sticking to a budget is crucial for financial success. Start by tracking your income and expenses for a month, then categorize your expenses into fixed and variable categories. Fixed expenses, such as rent or mortgage payments, remain the same each month. Variable expenses, such as groceries or entertainment, can fluctuate. Once you have a clear picture of your spending habits, find areas where you can cut back and create a budget that aligns with your financial goals.

As a thumb rule of budget allocation, a beginner can adopt 50-30-20 rule. It means 50% of income can be spent on basic needs. These include rent, EMI, food, transport, clothes, electricity bills, phone bills, water bills etc. Then 30% of income can be spent on various wants such as car, vacation, fashion, electronic items. The remaining 20% can be left for savings and investment.

In later phase of the financial planning this ratio can be changed to 40-20-40. It means 40% of income on basic needs, 20% on wants and remaining 40% on saving and investment. 

III) Build an Emergency Fund

An emergency fund is money set aside to cover unexpected expenses, such as a medical emergency or job loss. Experts recommend having six to twelve months’ worth of expenses saved in an emergency fund. Start by setting a small goal, such as saving Rs. 2000, then gradually increase the amount over time. This fund can be saved in the form of cash (10%), bank (20%) and liquid mutual fund ( 70%). for investment in mutual funds some of the important factors should be kept in mind which are elaborated in the blog of this channel 

IV) Buy a Large Life insurance along with critical illness cover

This is always suggested to buy a large life insurance cover along with critical illness cover. As the life is so uncertain, it is good to ensure financial protection to the family members in the event of some tragedy. Critical illness cover is also very important as this will ensure to cover huge medical expenditure and financial assistance to the person and the family. 

V) Pay Off Debt

Debt can be a significant barrier to financial success, so it’s essential to pay off any outstanding debts as soon as possible. Start by focusing on high-interest debt, such as credit card balances. Once high-interest debt is paid off, focus on other debts, such as student loans or car loans.

VI) Start Investing early and do it  for the Future

Investing is a crucial part of financial planning and can help grow your wealth over time. There are many different investment options, including stocks, bonds, and real estate. Consider working with a financial advisor to determine the best investment strategy for your goals and risk tolerance. The most important thing is to start investing at the earliest in your professional life. One should take benefits of compounding in investment. # example of early investment benefits-

VII) Review and Adjust

Finally, it’s essential to regularly review and adjust your financial plan as necessary. Life events, such as a new job or a new baby, can impact your financial goals and require adjustments to your plan. Review your plan at least once a year, and make any necessary adjustments to stay on track.

VIII) Multiple source of income

One question comes to mind of many of us that when there are not enough income then how to save and invest for wealth creation. This is a genuine situation for many people. Therefore one should realise his potential to the fullest and shouldn’t rely only on one source of income. Apart from his active and main source of income he should work on developing other type of skills as well which can help him to generate extra income in a passive manner.

IX) Conclusion

financial planning can seem daunting at first, but with some basic knowledge and a plan in place, anyone can achieve financial success. Set goals, create a budget, build an emergency fund, pay off debt, invest for the future, and regularly review and adjust your plan. By following these steps, you’ll be on your way to a financially sound future.