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Understanding the Steps Involved in Successful Financial Planning

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Financial planning is a process where you create a framework to achieve your financial goals in a certain time frame. Rather than being a one-off decision, it is a constant process of taking logical decisions so that the plan is regularly updated as per the current challenges and ensures the fulfilment of your financial goals.

However, most people feel that they do not have an eye for the right kind of investment or the ability to manage money or expand their finances. This article offers a few tips for personal financial planning for beginners and the reasons why you should plan your finances smartly. We will also learn about the steps involved in effective financial planning.

Reasons You Should Create a Financial Plan

The following are some reasons as to why you should do successful financial planning –

  • Better Living Standards – With a successful financial plan, you would be able to invest wisely early on in your career and save more, thus expanding your wealth. This will also help you gain clarity as to the necessity of each spending, which can add to the investment part and help you make a secure future for yourself.
  • Prepares You for Emergencies – An emergency fund is one of the most important aspects of a progressive financial plan. This fund enables you to float through the toughest times of your life and helps you return to normalcy faster.
  • You Get to Have a Secured Retirement – Saving for retirement and future-healthcare associated costs is an important aspect of financial planning. Early investment planning equips individuals to enjoy their life post-retirement without any major concerns.
  • Growth in Wealth – The investments that you make as per your financial plan can help you grow your savings, meaning a growth of your wealth as well.

A Step-by-Step Guide for Financial Planning

The following is a step-by-step guide for successful financial planning –

1. Know Your Current Financial Situation

Before you start to create your financial plan, it is essential to analyse your current situation. You should figure out your debts, income, expenses as well as your assets before designing an ideal plan. Ideally, the list of your current assets should include –

  • Optimum balance in your current, savings, and money market accounts 
  • The number of stocks and bonds
  • The current market value of your home and other estates 
  • Your retirement savings

The debts that you should record are –

  • The balance on all the credit cards
  • Due home loan instalments
  • Your student loan payment
  • The remaining personal loan amount
  • The number of car loan instalments yet to be paid 

You should remove the amount of debts you need to pay from your total assets to estimate your current net worth. If you get a negative number, it would imply that your assets are insufficient to cover your debts.

To get a better picture of your financial status, you should also include your household income and expenses including -

  • Debt payments
  • Rent
  • Food and dining out
  • Entertainment
  • Utility bills
  • Cable and phone bills
  • Travel expenses like gas and toll charges 

By comparing your income and expenses, you would get a better clarity about the cash flow. This sets the foundation for your financial plan’s blueprint – when you know your financial standing, you can create a better investment plan. 

2. Set Goals

Setting financial goals implies creating realistic financial targets that you plan to achieve in a set duration. A successful financial plan is one where your goals are based on your current financial situation. It is crucial to set both short-term and long-term goals.

Some of the most common financial goals are –

  • Repaying loans
  • Saving for retirement
  • Saving to travel
  • Creating an emergency corpus
  • Planning for children’s education
  • Purchasing a new home

Having set the goals, you should now understand the importance and priority of each financial goal and classify them accordingly. You should also look into how long would it take to achieve certain goals.

For instance, you may need to purchase a new home and sponsor your child’s education as well. In this case, you should be aware of the need of the hour and invest there accordingly. So if your priority is your child’s further studies, you can set aside a fixed amount every month and invest in a promising plan. This needs to start early on in the child’s life so that the amount is available for them when they are ready to pursue higher education.

Once you have set your priorities, you should now look into how much money would you need to invest to achieve the goal. However, you can determine the amount only after comparing your income and expenditure. To achieve this goal, you can look for areas where you can reduce your expenses. Extra income, too, can help in achieving the financial goal.

3. Create a Financial Plan

Once you set your goals, you should then focus on creating a comprehensive financial plan to ensure their optimal fulfilment. Successful financial planning requires you to create a roadmap to achieve each of the financial goals you have. For instance, if your ultimate goal is to save for retirement, you can start saving early into a balanced financial portfolio and let your money grow. You can achieve this goal by investing in both long-term and short-term investment plans.

Some investment options that you can put your money in include –

  • Mutual Funds
  • Fixed Deposits
  • Bonds
  • Debentures
  • Gold Certificate
  • Equity

Note – You should look at your income and expenditures first before investing to verify if there is a scope for reducing your expenses – this can provide you with more funds that you can invest.

4. Manage Your Money

Savings accounts are often used to save for short-term objectives such as paying off debt. However, there are other ways to save money if your objectives are long-term or entail investment. You must consider the following factors to choose the investment vehicle that best suits your requirements –

  • Risk Tolerance - The degree to which you are willing to take financial risks in the expectation of higher returns later on is known as your risk tolerance. Your risk tolerance ultimately depends on your personality – there is no ideal level or stage for this. Some people put their money into investments that have a good chance of holding their principal value even if there is little to no expansion. Conversely, seasoned investors will feel at ease making riskier bets in an effort to reap more benefits.
  • The Amount of Time for Which You Plan to Invest - A person's risk tolerance might also be determined by the length of the period they have to invest. For instance, a cautious choice may be the best to ensure that your funds will be accessible if required within a year or two. When making investments that won't be needed for a while, however, one can take more risks as there can still be time to recover the losses.

5. Review Your Plan

As discussed in the beginning, your financial strategy ought to be a dynamic process. It is advisable to spend some time checking on your assets and savings regularly to check whether they are on track to reach your financial targets. This can help you make any required adjustments if your present level of risk or investment sources are not generating the results you are hoping for.

 Your financial plan should be revised as your situation changes. For this, you can establish a regular timeframe for assessing your financial strategy and deciding where adjustments are needed. Additionally, you should examine your financial strategy if a significant change in your life, such as marriage, the start of your family, a change of employment, and more.

Personal Financial Planning Tips for Beginners

Financial planning is successful only if you begin saving early, no matter how inexperienced you are. You should create a comprehensive and systematic financial plan that helps you meet your financial goals. To achieve these goals, consider following the personal financial planning tips mentioned below:

  • Manage your money wisely
  • Regulate your expenses smartly
  • Maintain a personal balance sheet
  • Manage cash judiciously
  • Plan for your retirement well in advance
  • Create an investment portfolio

For beginners looking for high-return investments, it is usually recommended to start investing by putting some funds in mutual funds as they provide the benefits of professional fund management as well as portfolio diversification.

Key Takeaways

  • Financial planning is a process where you create a framework to achieve your financial goals. It is a constant process of taking logical decisions concerning money to ensure an absence of obstacles in achieving your financial goals.
  • A successful financial plan provides improved living standards, works as a retirement plan, acts as an emergency corpus, and facilitates the growth of wealth.
  • For successful financial planning, you should first understand your current financial situation by assessing your income, expenses, assets, and debts.
  • Creating a successful financial plan requires individuals to set financial goals. Making achievable financial goals that you intend to hit within a certain time frame constitutes setting financial goals. Your targets should be determined by your present financial condition in a good financial plan.
  • Setting both short- and long-term objectives is crucial. After establishing your financial goals, you should categorise them as per their value and priority and also consider how long it will take to accomplish various objectives.
  • Following the establishment of your objectives, you should concentrate on putting up a thorough financial strategy. A road map for achieving each of your financial goals is necessary for successful financial planning.
  • Savings accounts are frequently used to set money aside for pressing needs like debt repayment. If your goals are long-term or involve investing, you can find various other ways to save money.
  • As your financial plan is an ongoing activity, you must take considerable time reviewing your investments and savings regularly to evaluate whether they are on track to meet your financial targets. If the results that you are expecting are not being produced by your current degree of risk, you can make any necessary adjustments.
  • Irrespective of your experience in savings or investing, it is crucial to remember that early savings are the key to good financial planning.
  • To achieve your financial objectives, you would need to develop a thorough and organised financial strategy that considers the changes in your lifestyle, income, expenses, and more.
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