Financial Planning Tips for Beginners

Planning is one of the significant characteristics of human beings. When it comes to money, planning needs to be done as there are enough variables that can affect your financial planning. There are a few milestones that are very important in your life. Be it your first car, your own house, your children’s education or their marriage. It is your responsibility to plan finances to fulfil these needs. Financial planning is a process of making a concrete plan to meet your financial goals in a specific period of time. It is crucial to invest your money from now to make it easier to achieve your short as well as long-term goals.

Here are some crucial financial tips for beginners which will help young investors to give their financial goals a kick start.

1. Manage your finances:

Managing your money need not be boring. It's not rocket science. Also, you need not be from a financial background. All you need to do is show a bit of commitment. Deciding to save money is the very first step towards money management. Saving money is a powerful tool towards greater financial independence. You may have a number of financial goals in your life, such as buying a vehicle or the latest smartphone or wealth accumulation. In all these situations, what you need is money. But where will it come from? You got to have savings! My friend, saving surely helps you to avoid falling into the trap of debt. Not only this, systematic savings on a regular basis can make you rich. It is advisable to start saving at least 20% of your monthly income. This helps you to develop financial discipline. You can use any instrument – Mutual fund SIP, Recurring deposit, PPF, etc. after understanding the pros and cons of each.

2. Regulate your expenses:

If you are living on your paycheck and struggling for money even before the end of the month, then there is a chance you are living way beyond your means. This can happen if you have a lot of unplanned expenses! Unwanted expenses might leave you with no money for the necessities. However, there is a way out of this. Try making a budget. You may start by categorising your monthly expenses into fixed and variable, necessities and luxury, urgent and non-urgent. This way, you can create a full inventory of expenditures in front of you. Make sure that you commit to your budget. Consider this as a commitment instead of a burden.

3. Create an emergency fund:

Out of 20% savings from your monthly income, the first thing you should do is to accumulate at least your three months income. Keep it in a liquidate form to manage emergencies such as health-related problems or job loss. Emergency funds will help you to avoid unnecessary debts. If you have to handle an emergency, you are likely to swipe a credit card or look for soft loans at a high-interest rate. Moreover, the emergency fund will also help in ensuring that your EMI payments do not get bounced.

4. Buy adequate insurance:

Just as investing is essential for wealth creation, insurance is vital for wealth preservation. But investment and insurance are two different things which many of us don't understand. You need to realise that your life and your property is vulnerable to risks. These risks can lead to a complete loss of income and put you and your dependents in a financial difficulty. Ideally, you need to buy a life cover for at least ten times your annual income. Apart from life insurance, you may also need health insurance. It will help you to access high-quality healthcare at a reasonable cost. It is important to understand that you must not shell out more for less. Before buying an insurance policy, you can compare plans online and choose the one which satisfies your insurance requirements at affordable premiums.

5. Plan your taxes:

It is equally important to analyse your finances from a tax efficiency point of view. You can take advantage of the various tax deductions, exemptions and benefits so that you can lessen your tax liability at the end of the financial year. Even though tax planning is legitimate, you need to make sure that you don't indulge in tax avoidance or tax evasion. You can invest your money in several tax saving options. Section 80C of the Income Tax Act is the most efficient way to take advantage of tax deductions. You can also invest in equity-linked savings scheme (ELSS) mutual funds to save tax up to Rs. 45,000 and avail tax deduction up to Rs. 1,50,000.

Moreover, you should not see insurance policies as tax saving instruments. Buy insurance policy to cover the risk, but don't buy insurance policies just to save tax. There are many investment options where you can save tax and accumulate wealth over a period of time.

6. Manage your debt smartly:

Absence of debt management may eat up a significant portion of your monthly income. You may end up borrowing fresh to pay off older loans. Your crucial life goals may get sidelined, and even your retirement may get delayed because of excess debt. However, strategising your debt payment will keep you away from such troubles. Chalk out a schedule to pay off your debts and stay informed about how much you owe to whom.

In case you have more than one debt on your shoulder, start paying off the most expensive one. A credit card has been considered as the most expensive form of debt. As soon as your monthly income gets credited, pay off your credit card balance in full. Make sure to use the credit card only in case of financial emergencies. It is advisable to keep a loan as a last resort.

Managing finances should be backed by proper learning. It is crucial to learn that wealth can't be generated overnight. Planning your finances at an early stage is important, as it helps to develop a behaviour that will stay for long. Hence, you should try and impart financial aspects and should start working on it as soon as you get your first pay check. If you don't know where to start, never hesitate to take advice from a reliable source.