Introduction To Personal Financial Planning
Most of us who go through personal economic crises have realized the importance of solid financial guidance. The critical economic times affect our current financial status and future saving prospects. Therefore, it gets pressing under such circumstances that we develop a fool-proof personal financial plan.
This article will offer you insight on personal financial planning while guiding you step-by-step on its preparation and importance.
Personal Financial Planning and Its Importance
Personal financial planning is a thorough cognizance of your financial status, saving goals, and all the strategies for those goals. It projects years into the future and gives you a sense of the steps you need to take. An ideal financial plan includes your income, investments, savings, expenditures, debt, and insurance information.
Note that financial planning is necessary for everyone, with a little or a lot of money. It gives you a comprehensive picture of your financial situation. You get assistance in paying off debts, accumulating emergency funds, saving for mortgages, and planning retirement.
Some of the other benefits of personal financial planning are:
- Boosts savings: While drafting a personal financial plan, you get a good sense of your income and expenses. That way, you get to track and cut down extraneous costs and contribute to the savings in the long run.
- Maintain a practical lifestyle: With the entire financial status in the picture, you can stay on top of bills and payments. This lets you enjoy a relatively comfortable and practical lifestyle. You don’t need to be rich for that; you only need to be wise.
- Be prepared: Keeping aside emergency funds is a crucial part of a financial plan. It keeps you ahead of surprises. Once on top of a successful financial plan, you attain peace of mind.
Steps Toward a Successful Personal Financial Planning
Follow these steps for financial planning that works:
1. Set a Viable Goal
We all have different life aspirations when it comes to our future. Deciding where we want to be in 1o or 15 years becomes crucial for sketching a financial plan.
While we all wish for different things, being practical is the common virtue we must possess. Maybe you want to pay off all your debt and be free in five years. Or maybe you want to buy a lovely house, marry, have children and support them. But deciding to establish a multi-billionaire company in five years and basing your entire plan on that ‘what-if’ is foolhardy.
Now that you have a viable goal, start planning your finances around it. Divide your income into a 50:30:20 ratio. It’s a golden ratio where 50 percent of your income goes to utilities and rent. 30 percent goes to variable expenses like groceries or transportation. And 20 percent goes untouched to the savings. Your goal is to decide which ratio would be bigger for what purpose.
2. Set a Clear Priority
We can have different goals regarding finances. They could be immediate, medium-term, or long-term. How we prioritize them is going to make all the difference.
Stream 50 percent portion of the income towards the goals that require immediate concern. Like paying off debt in monthly installments. Then, direct the 30 percent portion towards the medium-term goals, like saving up for a mortgage, and the final 20 percent can go into your retirement savings.
These figures can vary depending on the number of your goals. Suppose you have overlapping goals, like supporting your children and saving for retirement. Then you can split the ratios even further and allocate sufficient proportions to each cause.
3. Make a Budget
After having a clear picture of your goal and its priority, move on to the next step: budget-making. A budget is the precise mapping of your income and expenditure so that you can make adjustments to your variable costs.
While creating your budget, note down all your incomes and expenses for a span of 30-days. Now, segment your budget into primary (fixed) and secondary (variable) costs. Your variable expenses should give you a picture of how much you spend on groceries, transport, or outings with friends. Try prioritizing these expenses and cutting down on redundant ones. Several budgeting apps are available that can make this process easier for you.
Now, use the cut amount from the variable to contribute to your savings every month. For instance, you can cut down from 30 percent of the variable to add to the 20 percent of the savings.
4. Clear the Debt
Before you move on to the bigger goals make sure you don’t have any debt tying you down. Saving up for early retirement, buying a house, supporting kids, or buying a car can all come later. Debt can be a perpetual phenomenon that can keep you trapped for a lifetime if you do not get rid of it early.
Moreover, if you do not prioritize your debt repayment, interests can impede your progress. It can also affect your financial savings in the long run.
4. Invest in Savings
At the end of the day, the whole point of the financial plan comes down to savings. Savings to secure future goals. Investing a little more into it doesn’t have to be a rich-people-thing. You can start investing with little money and see how it goes.
While investing is lucrative, you mustn’t put all your money into one asset. Even if you’ve taken to investing, make sure you fall under the thumb rule of 50:30:20, and allocate your resources wisely.
If you’re up and about a personal financial plan, start slowly and keep it steady. Make it a habit of sketching up your expenses, or have a personal balance sheet. If you have bumped into any problems, try seeking professional advice.
Don’t make any uninformed decisions that could hurt you in the long run. Always seek help if you don’t know the answer, rather than following your hunch and hitting the ‘invest’ button.
Looking for more tips and inspiration? Check out our guide on Self-Employment!