Dos and Don'ts for Financial Planning
The COVID-19 pandemic is the first crisis of its scale that has affected many people. But as history suggests, it most likely won’t be the last. Amongst the many lessons learned over time, one lesson to take away from this pandemic is the need to follow judicious financial practices consistently to shield from such unforeseen misfortune.
Moreover, a lack of basic financial education leaves many young adults mystified about money management. When you begin earning, you may realise that as a young adult, you have more disposable income that you can invest, than you’d have later in life. This period in life is crucial to cultivate valuable saving and investment routines in an attempt to better plan your future.
In an attempt to encourage good financial planning practices, here’s a brief list of the dos and don’ts of financial planning.
Start earlyFinancial goals should ideally be set at a young age. Early into your initial earnings, commit to regular savings and investments to build a handsome corpus. As a young adult, your risk appetite is considerably larger. You can make the most of it by earning potentially higher returns.
Set financial objectivesBefore designing a financial plan, one should be clear about their financial objectives. This is what is called financial goal setting and includes events like buying a house or saving money for a wedding. Setting financial goals acts as a stimulus to your financial plan.
BudgetingBudgeting is a process of looking at your estimated incomes and expenditures over a specific period. Preparing a financial budget is extremely important. It teaches you to save before you spend. There are several tools you can use to prepare a budget– a diary, an excel sheet or a budgeting app.
Acquire assetsFinancial planning includes investing your income to gain returns according to your risk appetite. These assets can be investments like mutual funds and equity or fixed assets like jewellery or real estate. If you don't build a strong asset base with your money, it would be sitting idle in a bank account.
Insurance and emergency fundsYou must cover abnormal risks by creating an emergency fund that essentially acts as a safety net for you and your family. Liquid funds and savings bank accounts are good avenues to park your emergency funds.
A term life insurance is essential in planning a secure future. Under life insurance schemes, you are required to pay a certain premium for a sum assured. In the event of the death of the policyholder, within the term period, their nominee receives the assured sum. Additionally, availing of health insurance to cover emergency medical expenses is a ‘life-saving’ investment.
Tax planningTax planning can help you manage and save tax thereby saving you money that would otherwise be blown on high taxes. It is important to be aware of the multiple deductibles and tax-saving schemes available.
Prioritizing wants instead of needsPrioritizing your needs over your wants in a balanced manner will help you to allocate resources to each. Impulse spending can be controlled using numerous psychological tricks and tips. For example, the 30-day rule of financial planning states that when you feel the urge to spend, let 30 days pass. If the urge persists, then it is a ‘need’ and no longer a ‘want’.
Not updating your financial planFinancial plans need to be updated from time to time. As life goals, progress and change, so should your financial plan. Keep track of your financial goals and modify the plan when needed.
Ignorance towards financial literacyProtecting and compounding your money is as important as earning. Financial literacy can help you plan financially, make wise decisions regarding your money and instil caution.
Getting stuck in a debt trapMaintain a lifestyle that allows you to live within your means. It is hard and sometimes impossible to crawl out of a debt trap. Taking on loans impulsively or unnecessarily can result in much higher outgoings in terms of the interest amount charged on the loan. Debt also directly impacts your credit score. One should always maintain a good credit score by repaying all their dues in time.
What is the most important step in financial planning?
Financial planning is the process of efficiently managing your finances while overcoming financial barriers to achieve your financial objectives. The first and the most important step in developing your financial plan is to set your financial goals at and for any point in life. It is advisable to meet with a financial advisor and discuss these goals. An advisor is a reliable resource who can guide you through the process to reach your end goals.
What is Tracking expenses in financial planning?
Tracking your expenses plays a significant and often underserved part in financial planning. It means identifying your expenditures throughout the week or month or year. Ideally, you should do this every day throughout the month. Keeping a daily record of your expenses by tracking bills and other outgoing expenses improves your budgeting and consequently your financial health. Expense tracking can keep you abreast regarding your cash flow and prepare for the tax season.
Crises will come and go. Our advice: focus on what you can control to build yourselves a better future. Financial planning is not constrained to any one person or any one time. Now that you are aware of some financial do’s and don’ts, begin with making the right decisions in your financial journey.
Frequently Asked Questions Expand All
The elements of a good financial plan include:
- Financial goal setting
- Emergency or liquid funds
- Savings and investments
- Insurance plans
- Risk management plan
- Income strategy
According to the popular “50/30/20” rule, in your monthly budget, you should keep aside 50% of your income for essentials like rent and food, 30% for discretionary spending, and at least 20% for savings. However, each person's capacity to save varies based on factors like income, age, financial goals, etc.
Managing risk is the process of identifying, analyzing, and mitigating uncertainty that is inherent in investment decisions.