Top 10 Things to Keep in Mind when Planning your Finances

So far, in this module on personal finance and financial planning for beginners, we’ve seen how India’s tax system is structured, particularly with regard to individuals like you. We also ventured into the various investment options available. The next logical step is to learn how to do financial planning. It may seem quite complex at the outset, but if you go a little deeper, you’ll see that it’s actually quite simple. In fact, financial planning for beginners is as simple as taking one step at a time. And a huge part of learning about how to do financial planning is to know what to consider and what to keep in mind during the journey. 

And that’s what we’ll discuss in this chapter. What are the things you need to keep in mind with regard to financial planning for beginners? And how to do financial planning right? Come, let’s find out.

1. Starting early gives you a tremendous advantage

If you remember correctly, we already discussed this particular point in chapter 2 of Module 1 of Smart Money. We took up a couple of scenarios and saw how much your investment corpus would get a boost if you started investing early. However, this point can’t be reiterated enough. If you start early, you get to make full use of the power of compounding, which can help multiply your returns exponentially. This gives you a huge head start and allows you to reach your financial goals much faster when compared with someone who starts much later in life.  

2. Creating a personal budget is a good place to get started

Drawing up a personal budget makes it easy to meet your financial goals and objectives. A budget can help you manage your finances efficiently by helping you cut unnecessary costs. This ultimately allows you to save more of your money. You could start off by adopting the 50-30-20 budgeting rule. You’ll recall that according to this method, you’re supposed to allocate 50% of your income for living expenses, 30% of your income for luxury and lifestyle expenses, and 20% of your income for savings and investment.  

3. An emergency fund is always a good idea

Life can be very unpredictable. To be able to tackle all of life’s curveballs, it is essential for you to have an emergency fund in place. A good way to set it up is by appropriating a portion of your savings and investment capital every month towards the fund. Your emergency fund should ideally be able to cover 6 months’ worth of your budgeted living expenses. This would come in handy for covering unexpected contingencies such as sudden unemployment or medical emergencies.  

4. There is such a thing as overusing credit cards 

Credit cards are convenient financial products that can help you pay for goods even when you’re short of cash. However, overusing or misusing them can trap you in major debt. This is because almost all credit card companies levy huge penalties and interest charges on the total outstanding credit amount. Therefore, it is a good idea to limit using your credit cards as much as you can. Also, try not to exceed utilising 30% of your total available credit limit. And always remember to pay your bills on time - before the due date if you can.

5. Tax benefits are your best friends

Tax payments can take up a huge chunk of your revenue. And so, it is of utmost importance to make full use of the various tax benefits that the Income Tax Act offers. When you’re planning your finances, it is advisable to do it in such a way that you get to avail the various deductions and exemptions offered to you by the act. Section 80C, for instance, gives you the option to reduce your total taxable income by up to Rs. 1.5 lakh in a financial year through various investments.     

6. Thinking long term pays off

It is never too early to start saving up for retirement. Although it might seem like a long way off if you’re in your 20s or 30s, the big day arrives rather quickly. Most financial planning experts advise having about 70-80% of your current salary as your post retirement income. Therefore, it becomes essential to start saving up for retirement as soon as possible. And, when you save for retirement through government sponsored schemes such as PPF, NPS, and Post Office Monthly Income Scheme, you can also claim tax benefits of up to Rs. 1.5 lakhs. 

7. Paying off debt needs to be a priority

Since loans and other debt carry high interest rates, they can quickly eat into your income and savings. However, you can easily prevent this from happening by prioritising repayment of all your loans. Once you’ve disposed of your loans, you can then redirect a larger portion of your income towards savings and investments, which would have otherwise gone towards repayment of debt.  

8. Keep your family in mind

Taking care of your family and ensuring that they’re financially stable should also form an important part of your financial plan. Here’s where insurance comes in handy. Life insurance plans protect your family with a financial safety net by providing them with a source of income in the event of your untimely demise. In addition to a life cover, certain insurance plans also double up as an investment option that can provide you with handsome returns.      

9. It’s okay (and even advisable) to seek professional help

Most beginners shy away from asking for help when it comes to financial planning. But it is advisable to seek the help of an experienced financial advisor when you’re unsure of how to proceed. Since they’re professionals with plenty of experience in the field of financial planning, they’re more than capable of guiding you and helping you achieve your financial objectives. Some professional advisors can even help you reduce your taxes and manage your investment portfolio for you.  

10. Review. Review. Review.

Financial planning is not a one-stop solution. Rather, it is a continuous process. That’s why it is essential to review your goals periodically, since they’re liable to change. And with every change in your financial goals, it becomes necessary to review and make changes to your investment portfolio and your financial plan as well. For instance, as you age, your risk appetite goes down and you might start focusing more on the long-term aspects of investment. In such a case, you would have to review your goals, your investment portfolio and your financial plan, and make changes appropriately.   

Wrapping up

These 10 pointers that we just saw are not the only ones to keep in mind when planning your finances. However, these are some of the most important. That said, there are two things that you should remember during financial planning - discipline and timing. Start your investments early even if it means that you would have to start small. And, maintain discipline by investing consistently and regularly. This way, you can maximise your returns. With this, we’ve finally come to the end of the personal finance module. Nevertheless, this is not the end. We will be taking a look at some more modules related to investments and finance in the near future. Till then, stay tuned and keep reading Smart Money.         

A quick recap

• f you start investing early, you get to make full use of the power of compounding, which can help multiply your returns exponentially. 
• Drawing up a personal budget makes it easy to meet your financial goals and objectives. 
• To be able to tackle all of life’s curveballs, it is essential for you to have an emergency fund in place.
• It is a good idea to limit using your credit cards as much as you can.
• Also, when you’re planning your finances, it is advisable to do it in such a way that you get to avail the various deductions and exemptions offered to you by the Income Tax Act.
• Thinking long term pays off. It is never too early to start saving up for retirement.
• Paying off debt needs to be a priority.
• Life insurance plans protect your family with a financial safety net by providing them with a source of income in the event of your untimely demise.
• It is advisable to seek the help of an experienced financial advisor when you’re unsure of how to proceed with financial planning.