1.Determine your short term and long term goals
The first step of financial planning, without a doubt, is determining your immediate and long term goals. This will give investors a clear perspective on how to build an investment plan. For example, if you have long term goals like retirement planning and have an aggressive risk appetite you can invest in a retirement fund that is equity oriented. But equity funds are volatile for short term investment and if you have any short term goals then you may look for relevant debt schemes that may hold the potential to help you achieve those goals.
2.Keep a close tab on your spends
If you have the habit of spending more than you save, that’s got to stop. If you want to achieve financial success in the future, you may start by spending less in the present. Be it a small thing or a large purchase, make sure you jot everything down and keep a close track of your monthly spending. This will give you a clear understanding about where your money is going and if there is a way to reduce these expenses. If you have the habit of frequenting restaurants, you can bring that to a halt. Or if you use a personal vehicle to travel everywhere, you can bring down your expenses by opting for public transport instead. Use an expense tracker app if possible so that you get a clear idea whether your expenses are superseding your income.
3.Save so you can invest
The most important thing in financial planning is not just managing your expenses, but also saving a decent amount of money so that you are able to allot a portion of this savings for investment. The problem is that most people follow this formula: income – expenses = savings. However, this formula is not at all a legit formula especially if you want to remain financially stable for the long run. Instead of spending first and saving what is left, investors should be doing the other way round. The formula one should be following is: income – savings = expenses. Yes, you should first decide how much you want to save monthly and keep that money aside and then spend what is left.
4.Always remain debt free
Remember that a credit card may seem like a saviour at the end of the month, but in reality it is actually eating up your savings. If you have any unpaid credit card bills, please pay them beforehand. Also if you have any loans or own any personal debts, do get rid of all of them. Because if you want to build a decent corpus through effective financial planning, you cannot afford to have any debts.
5.Build an emergency fund
You may be in good health now and so might be everyone close to you. But emergencies are unpredictable and you never know when a time will come when you might be in need of immediate money. If you do not have an emergency fund, you may have to break your investments. If you do not want to fail at financial planning, make sure that you build an emergency fund. You can use a liquid fund to build an emergency fund so that in case of an exigency, your investments remain unaffected.
6.Build a fund for unbridled expenses
Now we understand as young individuals, there are going to be moments where you will be engaging in weekend parties or outgoings with friends and colleagues. To take care of these expenses, investors should reserve 10 percent of their income for such unbridled expenses. This way, they will not have to touch their investments and they can use this fund money to buy them products or services of their desire.
7.Invest in a tax saving scheme
This is something that young investors do not pay heed to until they realize that they should have earlier. Tax deductions increase along with your salary. If you do not invest in the right tax saving scheme, you will have to face the brunt in future. Also, why do you want your hard earned money to be taken away by the government when you can invest it and earn some capital appreciation out of it? Tax saver funds like ELSS allow individuals to invest up to Rs. 1.5 lakh per fiscal year and claim tax deductions for the same. However, since it is an equity oriented scheme, investors should first determine their risk appetite before investing in
Do remember to implicate these tips while making a financial plan. If you want to build wealth over the long term, financial planning is essential and should not be taken lightly.
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