Personal finance planning is a strategy that helps you in managing your money in order to save, invest, and cover unforeseen risks. The main aim is to make you financially healthy and help you achieve your fiscal goals.
The purpose of planning your finances can never be exhaustively explained as it changes from one person to another. But the reasons are numerous, and some of the important ones are as under.
- To ensure that you meet your financial needs such as investment, savings, and expenditures
- To be able to manage your income ideally without overspending or spending on things you do not need
- To strategize your savings and expenses by planning a budget that will help you understand how much you earn and how much you can spend without causing a hole in your pocket
- To increase your cash flow by keeping track of expenditures and planning your taxes
- To offer financial security to your loved ones, and to be able to cater to their financial needs even when the economy is failing
- To have a better understanding of finance and be able to make better decisions
- To keep yourself away from unmanageable debts that otherwise may cause a crisis
- To be able to determine the real value of your assets, as well as to ensure its growth
- To raise your standard of living
When you’ve planned your funds properly, it not only helps you lead a stress-free life but will also cushion a fall during an economic crisis. If you are one of those who haven’t yet planned, do not wait until you are a victim of a commercial downfall. Plan ahead, and make the necessary moves before it’s too late. You must keep in mind that understanding personal finance gives you a stable fiscal future.
Benefits of Personal Finance Planning
A financial plan done right is an investment for one’s whole life. There are innumerable benefits of planning your finances regularly, from having a secure future to understanding whether there are any unforeseen financial risks in your life. Some of the benefits of sound personal finance planning that you can reap in the long run are:
- It gives you an insight into your fiscal condition and forms the basis of planning for the years to come. By aiding in evaluating your present financial situation, it helps to access your future financial health and take necessary action.
- You are offered several opportunities for investments based on your current financial health. You can choose from bonds, equity shares, mutual funds, public provident funds, and alike and prepare your investment accordingly.
- It keeps you focused on your financial goals on a long-run basis, as being aware of your resources aids in being determined to succeed.
- You will be more organized and alert about your spending and savings. We often spend a lot of money during the first half of the month and tend to remain oblivious to it. When you plan your spending, you will be more organized and aware of where the money was spent and how that can be preserved and invested.
- With a well-planned and implemented personal planning, you have full control over your cash. It helps you keep an eye on your fiscal goals, as well as into funneling money for other needs. As you have full control, you can plan better to keep your future requirements intact.
- You will be more aware of how your money is utilized. Most times, we fail to recognize where a chunk of wealth was wasted. By organizing your personal finance, you can stay more focused and understand those regions where you spend unnecessarily, and invest in those that reap more perks.
Healthy Practices for Financial Planning
If you haven’t made any fiscal plan, it’s time you give it a thought and take action. It’s never too late to assess and change, especially that which can have a massive impact on your course, as well as on the lives of those you love. So get started on these practices to put together a financial plan that will drive you and your loved ones to healthy financial security.
Investing should be your number one priority. It may take some time to understand how you can go ahead with it, but if you have any money left from the previous year, invest it. Channel your capital into something that has a profitable return, such as stocks, bonds, or assets.
You can learn all about investing and start doing it without the help of an advisor. But if time is a constraint, it is ideal to look for someone who can help you decide when to invest, when to buy, and when to sell. You can also seek help from Robo-advisors, such as Acorns, Stach, and M1 Finance, for automated-investing and forget about doing the heavy lifting.
Build an Emergency Fund
Emergencies are always unpredictable. You never know when you may need a lump sum of money. An accident, unforeseen sickness, business loss, or any such unexpected challenges may make their way into your life at any time. An emergency fund can be a lifesaver in such circumstances. It is up to you how much you want to invest in your emergency fund. Most times, it depends on your monthly earnings and expenses.
If you do not have an emergency fund yet, then now is the right time to start. Make a resolution and build your emergency fund today before it is too late. Start by setting a goal. You can build it up from a small amount and increase saving up more month by month. Don’t be discouraged if you are far from the goal. The key is to be consistent and make sure that it gets funded month by month.
Don’t Hold onto Your Credit Card Debt
Your financial health depends on your debts. Almost every household owns a credit card that bogs down their financial prosperity. The most crucial step to ensuring that you do not hold up on your monetary success is by paying your credit card debts on time. By delaying the repayment of your dues, you are causing severe damage to your credit score. Furthermore, if you fail to, or go beyond the last day, to pay your credit card debts, you will incur an extra cost that not only ruins your credit score, but also appends an additional fee to your monthly expense. Repayment of credit card dues on or before time is one of the crucial steps to your finance’s health.
Plan Your Budget and Stick to It
If you don’t already have a budget, it’s time you start one. It is never too late to organize your finances and set a limit to your expenditure. Creating and sticking to a budget might be habit you have ever made, as it forces you to take a hard look at your income, what you spend, and what you owe. Starting a budget can be daunting at the beginning, but once you begin to realize its gains, you will understand how to improve it as well.
Pay off Debts
Two of the most substantial consumer debts in the US are mortgages and student loans. If you have either of the two, you will know how painful it is. Who wouldn’t want to get rid of their debt altogether?
An ideal way to wave goodbye to your loan is to get organized. You must know whom you owe, how much you owe, what the interest payable is, and how to pay it back. Your priority must be to pay off any loan that you have borrowed so that you do not incur more interest or damage your credit score.
For many people, a student loan works as a barrier against achieving their financial goals. Have you heard of income-driven repayment plans? They reduce your loan repayment amount and possibly forgive some of the debt as well. But there are some risks associated as well. Call your lender to understand the perils involved and plan how you can repay them.
Open a Retirement Account
Do you have a retirement account? Have you planned your income for after you stop working? If you haven’t designed anything yet, it is high time you start. The sooner you start, the more secure you will be when the time comes for you to bid farewell to your employer. A retirement account is one of the most crucial steps to long-term financial success.
If you are employed, talk to your employer about retirement accounts like 401(k)s or 403(b)s. A percentage of your annual contribution is matched by your employer, which acts as a bonus to your savings.
If you are self-employed or if your employer does not offer a retirement account, you can still secure your future with Individual Retirement Accounts (IRAs). If you already have a retirement account, then look for ways to improve it.
Build Your Credit Score
A good credit score offers several benefits, such as a low-interest rate, negotiating authority, easy loan approvals, and such. If you do not have one, it’s time you start building it. It was put in place to help lenders and creditors to know their potential borrowers and understand whether there’s a risk in lending money.
You may not realize its importance now, but when the time comes for a credit card, a mortgage, or any loan, your credit score will establish whether you are a safe borrower. If lenders find you to be a risky debtor, your chances of loan approval are extremely low, and you will end up paying high interest. You may also need to seek help from a co-signer to have your application approved. It is vital to building a good credit score if you want to enjoy all the returns it offers.
Get Your Taxes Done Early
Tax season is one of the most stressful times, as there’s a lot to be done in a limited span. To start with, being organized with your finances helps while you file your taxes. But to put your mind at ease, the most ideal step is to get your taxes done early. While you don’t lose anything if you finish it up well before the deadline, you do have a lot to lose if you do not file promptly.
If you wait until close to the deadline, you will not only be stressed, but you may also not have enough freedom to arrange for something that turns out missing.
Tax is complicated. If you think it’s just going over your head, take help from service providers who do make you feel like it’s a breeze. They not only answer all your questions, but also help you with the filing.
This is something that most people resolve to follow every new year but always break it without fail. Spending less money is one of the most crucial steps to successful financial planning. You must start with understanding where your expenses lay and how you can cut back on them.
There are necessities, comforts, and luxury expenditures in every household. While food is a necessity, eating out is a comfort and luxury. Understand how to categorize your expenses, and you will find a way to spend less.
Get a Job that Pays Well
Many people settle at a job when they start to feel comfortable there, irrespective of whether they are being paid well or not. If you are one of them, it’s time to get a job that rewards better. You may be underpaid, or there may be good opportunities for you that pay more. Finding a career that compensates well may be easier than you think.
Most companies aim for employee retention. So your first step would be to stop by your manager’s office and talk about why you deserve a promotion. You will also find many competitors who will be willing to hire as well if you are looking for opportunities outside your current company.
Define Your Long-Term Financial Goals
Everyone gets so caught up in their present life that they forget to plan for the future. Personal financial plans are crucial to keeping your future secure. Set your long-term fiscal goals now before you lose track of where your money is going.
By defining your future goals, you can ensure that you are on track and your money is going where it should be. Long-term financial aims can be anything, from a retirement account to a down payment for a home, saving up for a trip, or an emergency fund. Setting up fiscal goals makes you aggressively work towards it.
Track Your Expenses
Setting a budget is one thing, but it is also important to track your payments. Knowing how much you spend each month allows you to make a more accurate budget. Start by recording your purchases so that you do not miss any expense. Categorize your expenses into entertainment, groceries, gas, and such. This will help you understand where you have been spending more and where you can cut back.