- Date : 06/02/2021
- Read: 5 mins
Find out how you can take care of all facets of financial planning with an exhaustive approach.
Just as various vitamins play a role in keeping you healthy, various aspects of financial planning can help you live a financially secure life. While each of these aspects may work differently for different people, what is unquestionable is that they are absolutely necessary. Let’s look at some recommended practices which, taken together, can help you put your finances in order.
1.Budgeting
Budgeting is one of the best ways to get control over your personal finances. To start the budgeting process, list down all your financial information and documents in one place. This includes all income sources, expenses, liabilities and debts, and investment commitments. This will help you calculate your monthly income & expenses. You can go a step further and identify the fixed and variable components of your income and expenditures. With a budget worked out, you can adjust your expenses to maximise your savings.
2.Expense monitoring
Monitoring expenses has become more complicated than ever, considering we use cash, wallet balances, credit cards, netbanking, and various other methods to make payments. You might also have set up an account auto-debit to pay for monthly expenses, such as utility bills or credit card dues. To keep track of these, use an expense tracking app or an Excel spreadsheet to understand your expenses each month. Regular monitoring will help you identify avoidable expenses – be it a subscription you rarely use or a utility bill that you are overpaying.
3.Insurance
Insurance is an essential – yet often overlooked – part of financial planning. The advantage of insurance is that you only need to spend a small amount every month to get a relatively large cover. An insurance cover for health, life, property, and vehicles are some common types of insurance everyone must invest in. In the case of term or life insurance, it can even help you secure your family’s future if they outlive you.
Related: Life insurance types simplified
4.Debt management
Having a debt minimisation or elimination plan can significantly help you put your finances in order. With most loans, interest is a major attached cost. Getting rid of debts helps you avoid this burden. So, try to aggressively settle your debts as early as possible (unless there is a clause that penalises you for paying off debt early). Other ways you can eliminate debt include adding an alternative source of income, selling off unused assets, and even going through your budget multiple times to identify where you can redirect money to your debt.
5.Building a contingency fund
Building a contingency or emergency fund means saving a portion of your income and keeping it ready to meet any unforeseen events. The money you save for this should be distinct from the money you set aside for investments or other expenditures. Make sure your emergency fund has enough money to meet at least six months’ worth of living expenses. This can help you in case you have an urgent medical expense or need to get back on your feet after losing your job.
Related: A step by step guide to building an emergency fund
6.Investment planning
Planning your investments can determine your financial future. Depending on your financial goals and aspirations, set up an investment portfolio that can yield your desired returns and is in line with the amount of risk you’re willing to take. From risk-free investments like fixed deposits and government saving schemes to market-linked mutual funds and equities, investments are meant to meet all your financial goals – both short- and long-term.
7.Retirement planning
Provident funds and pension funds are integrated into the pay packages of the salaried class, but they cannot address the need for retirement planning completely. You need to look into factors like future cost of living, post-retirement income sources, life expectancy etc. to understand how much you actually need to save up for your retirement. Building a corpus or securing a steady rental income at a young age needs to become an important part of your retirement planning.
Related: 6 Steps to calculate your retirement corpus
8.Tax planning
Astute tax planning starts at the beginning of the financial year, rather than as a last-minute step to save some money. When laid out for the whole year, you can make regular savings in tax-friendly investment instruments that don’t upset your monthly budget. In the absence of tax planning, you could end up making last-minute investments that may save tax but might not align with your long-term financial goals.
9.Estate planning
Just as insurance protects you during your lifetime, estate planning takes care of your family after your death by ensuring that your assets are completely accounted for and allocated rightfully to your heirs. As part of this, take stock of all your tangible and intangible assets and calculate your worth. It’s also important to identify your beneficiaries and name them in your will so there’s no ambiguity later. Make sure you hire a good estate planning lawyer, and update your will periodically as per your changing wishes.
Related: Estate planning: 10 Things to do before you die
By adhering to these various aspects of financial planning, you can maintain an all-encompassing view of your finances. By planning, saving, and investing, you can slowly build your way to financial independence.
Just as various vitamins play a role in keeping you healthy, various aspects of financial planning can help you live a financially secure life. While each of these aspects may work differently for different people, what is unquestionable is that they are absolutely necessary. Let’s look at some recommended practices which, taken together, can help you put your finances in order.
1.Budgeting
Budgeting is one of the best ways to get control over your personal finances. To start the budgeting process, list down all your financial information and documents in one place. This includes all income sources, expenses, liabilities and debts, and investment commitments. This will help you calculate your monthly income & expenses. You can go a step further and identify the fixed and variable components of your income and expenditures. With a budget worked out, you can adjust your expenses to maximise your savings.
2.Expense monitoring
Monitoring expenses has become more complicated than ever, considering we use cash, wallet balances, credit cards, netbanking, and various other methods to make payments. You might also have set up an account auto-debit to pay for monthly expenses, such as utility bills or credit card dues. To keep track of these, use an expense tracking app or an Excel spreadsheet to understand your expenses each month. Regular monitoring will help you identify avoidable expenses – be it a subscription you rarely use or a utility bill that you are overpaying.
3.Insurance
Insurance is an essential – yet often overlooked – part of financial planning. The advantage of insurance is that you only need to spend a small amount every month to get a relatively large cover. An insurance cover for health, life, property, and vehicles are some common types of insurance everyone must invest in. In the case of term or life insurance, it can even help you secure your family’s future if they outlive you.
Related: Life insurance types simplified
4.Debt management
Having a debt minimisation or elimination plan can significantly help you put your finances in order. With most loans, interest is a major attached cost. Getting rid of debts helps you avoid this burden. So, try to aggressively settle your debts as early as possible (unless there is a clause that penalises you for paying off debt early). Other ways you can eliminate debt include adding an alternative source of income, selling off unused assets, and even going through your budget multiple times to identify where you can redirect money to your debt.
5.Building a contingency fund
Building a contingency or emergency fund means saving a portion of your income and keeping it ready to meet any unforeseen events. The money you save for this should be distinct from the money you set aside for investments or other expenditures. Make sure your emergency fund has enough money to meet at least six months’ worth of living expenses. This can help you in case you have an urgent medical expense or need to get back on your feet after losing your job.
Related: A step by step guide to building an emergency fund
6.Investment planning
Planning your investments can determine your financial future. Depending on your financial goals and aspirations, set up an investment portfolio that can yield your desired returns and is in line with the amount of risk you’re willing to take. From risk-free investments like fixed deposits and government saving schemes to market-linked mutual funds and equities, investments are meant to meet all your financial goals – both short- and long-term.
7.Retirement planning
Provident funds and pension funds are integrated into the pay packages of the salaried class, but they cannot address the need for retirement planning completely. You need to look into factors like future cost of living, post-retirement income sources, life expectancy etc. to understand how much you actually need to save up for your retirement. Building a corpus or securing a steady rental income at a young age needs to become an important part of your retirement planning.
Related: 6 Steps to calculate your retirement corpus
8.Tax planning
Astute tax planning starts at the beginning of the financial year, rather than as a last-minute step to save some money. When laid out for the whole year, you can make regular savings in tax-friendly investment instruments that don’t upset your monthly budget. In the absence of tax planning, you could end up making last-minute investments that may save tax but might not align with your long-term financial goals.
9.Estate planning
Just as insurance protects you during your lifetime, estate planning takes care of your family after your death by ensuring that your assets are completely accounted for and allocated rightfully to your heirs. As part of this, take stock of all your tangible and intangible assets and calculate your worth. It’s also important to identify your beneficiaries and name them in your will so there’s no ambiguity later. Make sure you hire a good estate planning lawyer, and update your will periodically as per your changing wishes.
Related: Estate planning: 10 Things to do before you die
By adhering to these various aspects of financial planning, you can maintain an all-encompassing view of your finances. By planning, saving, and investing, you can slowly build your way to financial independence.
