While financial goals give you direction and purpose to build a brighter future, a financial plan is the roadmap towards it. In fact, it is a strategy that defines the goals and steps you should follow to achieve them.
To create one, you need to carefully assess your financial situation, set specific goals and develop strategies for budgeting, saving, investing and managing expenses.
But before you do that, there are some good and bad practices of personal finance planning that you should keep in mind.
1. Set personal finance goals
Efficient financial planning is incomplete without setting financial goals.
Finance goals are objectives you set for yourself for managing money. But something that’s more important than setting finance goals is setting the right ones. The best practice is to keep a defined timeline to achieve these goals.
Based on the timeline, you can set up three types of goals:
— Short-term goals
— Mid-term goals
— Long-term goals.
You can read more about it here.
2. Make financial literacy a priority
Financial literacy is one of the initial steps to taking control of your money.
When you educate yourself about money, you are able to take better decisions when it comes to saving, spending and investing.
This will help answer many of your personal finance questions like, “how to create a budget?”, “where should I invest?” or “what are taxes?”
3. Track your expenses
Tracking expenses is another good practice in personal finance planning. Tracking your money gives you a clear understanding of where your money is going. This can help you prioritize your expenses, avoid overspending and help you work towards your financial goals.
You can manually track all your expenses by maintaining a spreadsheet or going through your bank statement every month.
If you feel this is a very complex and inconvenient way of going about it, then you can try Zype’s spend analyzer, where you can get category-wise spending and set monthly budget goals.
4. Creating a realistic monthly budget
You can accomplish your long-term goals when you save more money. And you can save more money by creating a monthly budget. Start by tracking all your expenses and earnings. Next, subtract your expenses from your earnings to check if you’re overspending. After you get a clear insight into your current spending habits, you can decide where you want to cut down your expenses to increase your savings.
Create a budget at the start of the month and review it at the end of the month in order to check if you were able to stick to it. If you do this for 3-4 months, you will gain more awareness about your personal finances and will be able to create a more realistic budget going forward.
5. Build an emergency fund
An emergency fund is a pool of money that has 3-6 months of your living expenses that you can use during unforeseen times. With an emergency fund, you will always have instant access to money in times of need.
If you want to start building an emergency fund, calculate how much money you would need to save up and start saving a set amount every month.
Always remember to use your emergency funds only during crucial and unexpected events like a job loss, medical emergency or unexpected bills.
6. Start saving and investing every month
Make savings and investments a big part of your financial plan because it will help secure your financial future and meet your long-term goals faster.
It is extremely important to diversify and maintain a healthy balance between your savings and investments. Save some portion of your money regularly into a fixed deposit or invest it in assets such as stocks, bonds, real estate, etc to grow your portfolio.
If you’re just starting out, set financial goals, create a budget and automate your savings.
You should also research your investment options and consult a financial advisor who can guide you before you invest your money.
7. Start building a strong credit profile
A strong credit profile is the first sign of a responsible borrower and increases your chances of getting credit whenever you need.
It also gives you advantages like faster loan approvals, higher credit and lower interest rates.
If you want to improve your credit score and build a stronger credit profile, repay your loans on time, don’t exceed your credit utilization of 30% and keep monitoring your credit report to find any errors.
8. Start building a retirement fund
A retirement fund is extremely important to secure your future.
It helps you ensure you get to enjoy independence and a comfortable lifestyle during the years post-retirement.
Before you build a retirement fund, it is important to set clear goals on the amount of money you need to save for it.
Start by contributing more savings to your retirement fund, diversify your investments to manage risk and commit to more long-term savings.
Regularly review your plans and adjust wherever necessary to enjoy a financially stable retirement.
1. Don’t overspend & make impulsive purchases
One of the fundamental rules of financial planning is to avoid overspending. If you consistently run out of money before the end of the month, then chances are you are overspending and need to cut back on your expenses.
Avoiding impulsive purchases and overspending is extremely important to maintain financial stability. To avoid overspending, create a monthly budget and stick to it. It is important to make sure you’re saving money every month.
By being aware of your spending habits and implementing effective budgeting techniques, you can avoid making impulsive purchases and make progress towards your financial goals.
2. Don’t fall into a debt trap
If you miss your repayments once or twice due to genuine reasons, it might not create such a big problem. But if you’re consistently missing your repayments or maxing out your credit cards, then it could lead to a debt trap.
To avoid such a situation, it is important to be disciplined and keep your repayments in check.
If you’re someone who is already in debt, then there are many ways to break out of it.
Make a list of all your ongoing debts, prioritize your payments, and reduce your expenses to repay more. Read this blog to learn more about ways to become debt-free.
3. Don’t invest based on emotions
Investing is a good habit that can help you maximize your savings in the long run.
While it may be tempting to make investments that maximize your returns, it is extremely important to do your research before you invest your money.
It is equally important to not let emotions like greed or fear take over when it comes to investing.
4. Review & improve your financial plan regularly
Your income, expenses and goals will keep changing as you grow older, and so should your financial plan.
If you keep your financial plan unchanged, it will result in missed opportunities for increasing your savings, insufficient funds for your retirement and limited financial security.
It is always good practice to review your financial plan, because then you’re able to determine if you will be able to meet your financial goals or not.
5. Don’t forget to buy good insurance
Good insurance is important for financial security. Health insurance will cover medical expenses, healthcare and medicine costs during times of need. And a good life insurance will keep the future of your family secure in case of something unfortunate happening to you.
Before you purchase insurance, it is important to assess your personal needs, research the providers and understand what the insurance covers. You can also seek professional advice to make an informed decision.
Understanding the good and bad practices of financial planning can help you identify your goals and improve your financial health.
If you want the power and confidence to take control of your money and achieve your financial goals, then put your financial plan into action today.