There is an old axiom that says: “Failing to plan is planning to fail.” The same holds true for personal financial planning.
Unless you do proper financial planning and analysis, there is a very great possibility of falling short of money when you need it the most.
Unfortunately, lots of people don’t know the importance of financial planning. They just keep the surplus money in their Savings Bank account where it doesn’t gather much interest or works in their favour.
And in most cases, the small interest that a Savings Bank account pays is wiped out due to ATM card maintenance charges, cash withdrawal fees and other such unseen expenses.
If you are serious about wanting a secure life where you have money even after retirement, it’s best to do financial planning right now.
Maybe you don’t know how to do financial planning. That’s nothing unusual. Millions of people don’t know about financial planning.
Therefore, I’m presenting the five topmost ways to do financial planning for beginners. These tips could help you to have a financially secure future.
Let’s begin by comprehending what financial planning actually means. That would help you to better understand the five ways to do financial planning that I’m writing.
What is Financial Planning
The meaning of financial planning is managing your income and expenses properly. And that itself includes a lot of things.
It involves keeping a check on your expenses while finding the best ways and means to make your money work for itself and grow.
Financial planning also involves preparing or stashing away enough money for those golden years, when you’re above 60 years of age and won’t be working actively.
It involves taking into consideration how much money you have in hand and utilizing it properly to have a secure financial future for your family and yourself.
Actually, financial planning isn’t any rocket science, as most of you might wrongly believe. Instead, the process of financial planning is quite simple.
Now let’s proceed to discuss the top five ways to do financial planning for beginners.
Top 5 Ways to do Financial Planning for Beginners
These top five ways to do financial planning for beginners are time tested and proven. Of course, you can adapt them a bit to suit your own needs and financial situation.
However, these five ways to do financial planning can help you a lot now and in future.
1. Learn to Manage Your Money
Learning how to manage your money is the first and foremost way to do financial planning. Most of us never manage our money well. In the following paras, I will explain clearly what I mean by managing your money.
Most of us live by the principle that we save whatever is left over after spending on our monthly needs from the income. This is poor money management.
It means, you don’t plan your spending. Even if you have a budget, it could be too large for having adequate savings.
Therefore, follow this principle instead: Income minus Savings is equal to expenses (Income – Savings = Expenses). Now, this might sound a bit difficult for lots of us, but is really rather simple.
To take charge and manage your money, find out how much you’re spending per month. You’ll definitely come across a lot of expenses that are unnecessary or in excess of your budget.
Compare these with your savings. I’m sure that your savings would be different every month. That is, if you are saving any money at all.
Instead, take charge and decide how much money you wish to save every month from your income. And deduct that from your salary or income first. Use the remaining money for your expenses.
Understandably, this could prove a bit difficult at the start. However, within two to three months, you’ll find it’s easy to live on the budget while saving a considerable part of the money.
Ideally, your savings should be between 30 percent and 50 percent of your income. Therefore, deduct the amount from your income before spending.
And stick to your spending limits instead of digging into the money you keep away.
Avoid the use of credit cards because they attract a very high Annual Purchase Rate (APR) which comes disguised as easy payment options.
When you don’t settle the credit card dues in full, the bank or the issuing company adds the APR on the balance. And this APR gathers more APR or what you could call interest.
In some cases, you’ll find that the simple tube of toothpaste you bought using a credit card has cost you thrice its maximum retail price, if you allow APR to accumulate.
If you do use a credit card, make sure to settle all the dues in time without leaving any unpaid balances.
Taking charge of your money helps you to save a lot. And therefore, this is the first and most important step of personal financial planning.
2. Plan for Time Value of Money
Do you know what is the Time Value of Money or TVM? I’ll explain that in simplest terms to you. Consider you have Rs.200 today. Of this, you take Rs.100 and keep it away safe at your home.
The other Rs.100 you deposit in your Savings Account and leave it untouched for a year. At the end of the year, the Rs.100 you’ve kept at home doesn’t gain any interest.
But the money you’ve kept in your account gains interest at 4.5 percent. That means, you have Rs.104.50.
During the year, the value of the Rupee and its buying power dropped by 4.5 percent due to inflation. This means, the Rs.100 you have at home will be only worth Rs.95.50.
And the money- Rs.104.50 which you kept in the bank, will be worth Rs.100 only.
Now let’s consider you kept the Rs.100 in a Fixed Deposit at 5.5 percent interest. This means, your money has grown to Rs.105.50.
If we deduct the TVM, it works to Rs.101.50- which is greater than the fall in the Rupee price and buying power due to inflation.
We need to consider TVM very seriously. That’s because keeping money at home or an ordinary Savings Bank account will not help us to beat the TVM.
The value of our money and its purchasing power will continue dropping. And after 10 years, you might find that all the money in your Savings Account has lost the buying power it had one decade ago.
The best way to beat the TVM is by investing your money in a manner that fetches returns that are far greater than the Rupee value and buying power depreciation over a span of time.
3. Invest Your Money Wisely
Now that you’re aware of TVM and the imminent depreciation of the Rupee and its buying power, let’s explore ways and means to protect yourself from this unavoidable situation.
In my humble opinion, the best way to overcome TVM and get better value for your money is by investing it in instruments that provide very high returns.
If you’re averse to taking risks, I would suggest that you invest your money in Mutual Funds. For beginners, I’ll explain what’re Mutual Funds.
Basically, a Mutual Fund is a bouquet or basket of stocks or debt instruments of top companies. An Asset Management Company buys such stocks or debt instruments or both and forms a basket.
They offer you a share of this basket. This means, each unit of Mutual Funds that you hold actually consists of stocks of several companies or debt instruments of various organizations.
Instead of investing in individual stocks on the stock exchanges, Mutual Funds allows you to invest in lots of stocks and become a part-owner.
When the prices of these stocks or debt instruments go up, so does the value of each unit of the Mutual Fund where you’ve invested.
Generally, Equity-based Mutual Funds provide returns between 18 percent and 28 percent and sometimes, even higher.
Debt Mutual Funds give returns of 10 percent to 18 percent while Liquid Mutual Funds offer returns up to 12 percent.
This amount far exceeds what you could lose by means of TVM. Hence, Mutual Fund investments help your money to grow, even without you doing anything.
The other best way to make your money work and grow is by buying stocks of companies through the stock market.
Stocks you buy today will definitely become expensive over a period of time. Some stocks offer as much as 200 percent returns, over a period of time.
This means, you’ve not only beaten TVM but also made a decent profit that you can utilize in your golden years.
However, investments are possible only when you follow the formula of Income minus savings equals expenses.
The higher your savings, the greater your chances of growing the money and beating the TVM value and purchasing power depreciation.
4. Resolve to Buy a House
Owning real estate in India is like having a very precious asset. And real estate prices in India are always on the upswing, despite occasional drops due to reasons such as economic recession or pandemics.
Therefore, the fourth way to do financial planning is to resolve to buy a house as a beginner and start planning for it.
Nowadays, almost every bank offers a housing loan. You can avail of these easily. The younger you start, the longer the tenure of a housing loan you could get from any bank or Non-Banking Financial Company (NBFC) or housing finance providers.
Normally, to buy a house on loan in India, you need to put at least 20 percent of the cost price upfront.
If you save enough money and make it grow, you will certainly have this 20 percent of the cost price ready when you go to buy a house.
Now here’s something important to remember. Housing finance doesn’t come cheap. In fact, when you take a housing loan and pay Equated Monthly Instalments over a period of years, you might find that you’ve actually paid double the price of the property, if not more.
However, in the same period, the value of your property would have doubled, if not tripled. This means, you’ve not only beaten the TVM on its track but also can make a decent profit, if you were to sell this house.
One of the best ways to calculate the amount of money you’ll pay as EMI is to contrast it against the rent that you would pay monthly to rent a similar place.
Usually, you’ll find that the rent you would have to pay would be somewhat equal to the EMI of the housing loan.
However, the greatest difference is that you might have to leave the rented house anytime and your money goes waste. Instead, availing of a housing loan and paying EMIs means you’ll end up actually owning the property.
5. Plan for Your Retirement
Unless you’re among those fortunate enough to get a pension from your employer when you’re no longer working, it’s best to start planning for your retirement, as part of your financial planning as a beginner.
You might get this feeling that it’s too early in life now to start planning for retirement. That’s a sheer myth. The earlier you start financial planning for your retirement, the better for your golden years, when you won’t have an active income.
There’re plenty of annuity plans available from NBFCs and Asset Management Companies in India. One of them is the government-sponsored National Pension Scheme.
Another is the Atal Pension Yojana. Both are available with very nominal subscriptions, though you can decide to contribute more money, voluntarily.
For example, NPS is available in two tiers- Tier-1 and Tier-2. The minimum contribution to each tire is Rs.500 only per year.
But you can remit up to a maximum of Rs.5,000 per month to each tire, which is Rs.10,000 per month. The NPS is managed by National Securities Depository Limited (NSDL).
The money you invest goes towards buying units in pension plans of various NBFCs such as LIC, UTI, HDFC, Kotak and SBI.
You get to choose which company’s plans you want for Tier-1 and Tier-2.
Upon attaining the age of 60 years, NPS will pay you a monthly pension depending upon your total contributions.
The amount you have invested stays intact and also attracts interest because it gets invested in annuities.
You can withdraw the NPS amount upon attaining the age of 60 or the full amount with interest is paid to your successors after your demise.
Other than NPS and Atal Pension Yojana, there are excellent annuity plans available from both the public sector and private sector NBFCs and AMCs. Investing in these should be a part of your financial planning as a beginner.
In Conclusion
These five ways to do financial planning for beginners might sound difficult at the beginning. Therefore, let me assure you, they are very simple and easy to implement.
All it requires is financial discipline from you. This means, getting rid of unwanted expenses to save more money.
You could download and use any superb financial planning app in India that keeps track of your spending and alerts you when you are crossing the limit.
Most of these apps track all payments made through your mobile phone. And you can key in other expenses manually. Proper financial planning as a beginner can secure your financial life now and in future too.