Presently, a significant part of the young generation is living paycheck to paycheck. This means they are lacking over a well-thought budget for their rainy days or retirement. Most people think they can borrow some money from friends or family when there is a certain emergency. Well, it is not going to improve their financial status sooner or later.
If you do not want to be like them, you should be ready with effective financial planning. It will not only help you in the emergency days but also you can live your life to the fullest in every major event of your life like marriage, kids, vacations, and much more.
Here is a brief list of steps involved in an effective financial planning process. Let’s start below:
Some of the steps in effective Financial Planning are:
STEP 1: Analyze Your Current Financial Situation
The first step is to analyze your current financial situation. It is important to understand your present income, expenses, debts, etc. To get information on your financial situation, you can start with your savings account statement that can help a lot. It is one of the easiest steps with your plan to start analyzing your current financial status while setting objectives for establishing a successful financial plan.
By looking at your account statement, you can get help from all the money you have earned plus, the money you have spent on the expenses. If they both don’t tally and the expenses are more or equal to your income, your financial planning decision requires a serious action.
STEP 2: Cut Down on Debt
Nowadays, everyone owns a credit card. Having a credit card is always equal to debts, not only in the present life but also in the future. The game of using plastic money and adding the interest rate on the same can keep going on for your whole life. Therefore, it requires an action to cut down on debts from credit cards or any other source.
Try to make a budget for every month that falls in-between your income resources which can help you for your financial planning process. Sticking to it will allow you to get financial freedom. To do so, you can categorize your expenses as follows:
- Urgent vs Non-urgent
- Necessity vs Luxury
In our routine life, there are several expenses that we can avoid. For instance, online shopping portals have called for a consumer spending driven world. Whether you require a certain thing or not, you will eventually buy it (if you simply like it over the internet). Therefore, you can restrain yourself from doing unnecessary shopping. Similarly, there are several other expenses that you can figure out while performing self financial analysis.
STEP 3: Identifying Your Financial Goals
In everyone’s life, identifying goals is important to make appropriate investment and finance plan. When you are under 18, paying college tuition is a goal. When you’re a working professional, your goal is to save for marriage and family. Therefore, you can start setting up both short-term and long-term goals for your life with proper financial decisions according to your goals. For example, you can set goals with action like saving for higher education, marriage, or kids.
The same rule of categorizing needs stands true here. Prioritize your needs and then set your financial goals.
STEP 4: Save For Your Retirement
You should always have a retirement plan ready by your side with your other goals. Try to improve your financial sufficiency for the retirement days with a plan. If you are planning for retirement you should also know what is a 401a & 401k. 401a plans are offered by government and nonprofit employers, but 401k plans are common in the private sector.
Moreover, we are living in a world where inflation is on the rise: everything will be more expensive with every passing year. And, if you wish to build a bridge for the inflation gap, it is important to start with a financing planning process now.
STEP 5: Allocate 10% of Monthly Income to Saving
Financial Planning is for everybody. A basic thumb rule for financial planning is to save at least 10% of your monthly income. No matter how much you are earning, saving this small portion of the income will pave a way towards achieving stable and effective financial goals for both rainy days and retirement.
For personal expenses like medical, you can start investing this amount in insurance plans, instead of simply saving it. There are other options available like opening a Fixed Deposit or Recurring Deposits.
Financial Planning is key if you wish to live an independent and blissful life. And you see, building and achieving successful financial planning is not complicated, given that we are well-organized about actions involved in finance planning.