Whether you have just started to earn or have been drawing a salary for years now, financial planning is a must. Especially if you are in the new crop of salaried professionals, you might be excited and wondering how to spend your money whenever your salary is credited.
However, most beginners do not have the required financial knowledge to make the most of this money and end up spending frivolously. Planning your finances is a skill that can be learned at any age and even mastered with time. In this blog, you will find some essential tips, as a beginner, on effective financial planning, budgeting, investing, and much more.
Tips for effective financial planning for beginners
Manage your money wisely
Managing your money is not always as difficult as it seems. All it requires is some discipline and commitment. Whenever you receive money, split it up into various heads such as equated monthly instalments (EMIs), bills, entertainment, savings, and so on. This will help you understand where you are spending so that you can cut back when necessary.
Saving money is crucial for financial independence. You can always start small and save at least 10% of your salary every month. Set up a monthly auto-debit if you fear that you may spend that money elsewhere.
Financial planning for beginners is incomplete without discussing the pros and cons of a credit card. While it is handy for short-term fund requirements, if not managed well, it can lead you to a debt trap. So, unless you are disciplined enough, it is best to avoid using it.
Create a financial budget
Create a plan on how you will spend your money every month. To begin with, identify all your sources of income. Then, clearly demarcate between your needs and wants.
Needs are an absolute must, such as food, clothing, shelter, and so on. Wants, on the other hand, are not essential but are good to have, such as watching movies, shopping, or going on a vacation. It is important to allocate a financial budget for both these heads.
Build an investment portfolio
It is advisable to conduct extensive research and spend some time on investment planning. A recurring deposit or savings bank account might not fetch you high rates of interest.
The investment you make every month should ideally be spread over various asset classes such as equity, debt, and cash. While equity is effective against inflation and may provide tax benefits, never rely on just one type of investment. Diversify your portfolio and consider long-term wealth accumulation.
Once you have a portfolio ready, review it regularly. Set a frequency (quarterly, bi-annually, or annually) and ensure that your investment risk is within manageable limits to protect you from market fluctuations.
Set your personal and professional goals
Financial planning also involves setting objectives that will drive you to manage your money better. A goal will also help you identify your path and chart a course of action.
A personal goal could be buying a house, traveling to your dream destination, or purchasing a luxury car. Make a list of your objectives and segregate them into short-term, medium-term, and long-term. Then, set a deadline for each of these desires and invest accordingly.
Once you have your personal goals in place, focus on your professional goals and create a clear-cut plan to achieve them. In fact, realising your professional goals will bring you closer to your personal ones.
Plan your retirement
One of the most underrated money-saving tips is saving for your retirement at an early age. While it may seem too far-fetched, if you start saving for retirement now, you can end up with a huge corpus when you retire, thanks to the power of compounding. The more you delay, the higher will be the investment you will need to make to achieve the same returns.
Again, investment planning is key here. Put money in different financial instruments such as stocks, fixed deposits (FDs), mutual funds, and much more.
Keep an emergency fund
Make a habit to save up some money regularly for an emergency. Even if your salary is seemingly low, make sure to set aside a small amount for contingencies. An emergency fund can help you in dire situations and ensure you are capable to meet any unexpected expenses.
Initially, it might seem difficult but if you treat it as a non-negotiable investment, it will soon add up to a sizeable amount.
Avoid landing in debt
One of the most crucial aspects of financial planning is debt management. If done incorrectly, it can have devastating consequences and devour your financial health. Make sure that you are well-informed of how much you owe to whom. Clear off the biggest debts first. If you have a massive amount payable, then consider a balance transfer and switch your loan to a bank that charges a lower rate of interest.
If you use a credit card, ensure that you pay off the bills in full and do not fall for the minimum balance trap. If you do so, soon enough, the interest will add up to a large chunk of your pay check.
In case you have to borrow, do it for purchasing an appreciating asset and not for a depreciating one. Moreover, if you need funds to achieve certain personal goals, save up for them and pay from your corpus instead of landing in debt.
Tax planning involves investing with the aim of cutting down your tax liability at the end of the financial year. There are several tax deductions and exemptions that can be availed of under sections 80C to 80U of the Income Tax Act, 1961.
Equity Linked Savings Scheme (ELSS) is one of the most efficient ways to utilise the benefits under section 80C. It entails risk but has a short lock-in period and is a diversified equity fund that can also help you earn high returns to achieve your financial goals.
For beginners, spending money may always seem easier than saving and investing it. But it can do a great amount of good if you fight the urge to spend incessantly, swipe that credit card, or take that loan.
Spend smartly, save wisely, and before you know it, you would have enough to call yourself wealthy!
This is a companion discussion topic for the original entry at https://jupiter.money/resources/financial-planning-for-beginners/