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Financial Planning for Beginners - Top 10 Golden Rules

Updated on: Jun 24th, 2024

4 min read

Financial planning is the process, which provides you a framework for achieving your life goals in a systematic and planned way by avoiding shocks and surprises. It comes with objectives, such as determining capital requirements, framing financial policies, and ensuring that the scarce financial resources are utilised the best possible way.

Instilling the habit of financial planning in young adults is a tough job. However, when they volunteer to plan about their finances, one wouldn’t know where and how to begin. Here are 10 golden rules that one must follow to plan their finances well.

1. Manage Your Money

Managing one’s money need not be boring. It’s not rocket science and you need not be from a financial background. You only need to show a bit of commitment.

Deciding to save is the first step towards money management. Saving money can be a powerful step towards greater financial independence. Imagine borrowing from a friend for that urgent visit to the doctor!

In case you don’t have any friends, you might have to swipe your credit card. And you know credit card is the most expensive form of debt. Repeat this a few more times and you end up in a debt trap even before you realize that.

You may have many financial goals in your mind. Like buying a vehicle or the latest smartphone or wealth accumulation. In all these situations, you need money. But where will it come from? You got to have savings!

Saving money helps you avoid falling into debt traps. Not only this, but systematic saving on a regular basis can make you rich. You may achieve your financial goals in a timely manner. Now you might be wondering how to save? And even more important how much to save? As soon as you get your salary, start putting it under various heads. These heads can be expenses, EMIs, investments, and savings.

Ensure that you save a minimum of 10% of your income every month. It can be that simple! But don’t put it in a piggy bank. Idle money in a piggy bank doesn’t grow. Even the saving bank account may not fetch higher returns.

Instead, you may invest this amount in a liquid fund. Liquid fund is a type of debt mutual fund which invests money in fixed-income generating instruments like FDs, commercial paper, certificate of deposit etc. around 4%. Invest your savings every month over a long-term and see the magic it can do for you!

2. Regulate Your Expenses Wisely

If you are living paycheck to paycheck and finding yourself struggling for money even before the month ends, then chances are you are living way beyond your means. Maybe there are a lot of unplanned expenses! These might be leaving you with no money for the necessities. But there’s a way out of this.

Try preparing a budget. Unless you have a budget, you won’t be able to control your cash flows. A budget simply shows how much money you have coming in and how those funds are spent.

Start by categorizing your expenses into fixed and variable; urgent and non-urgent; necessities and luxury; avoidable and unavoidable. In this way, you will create a full inventory of expenses in front of you. The more you convert things from abstract to physical, the better you will get a hold of them.

You can create a hierarchy of needs and decide which ones to address first. It’s all about prioritizing. You need to accept that you have got limited resources and unlimited wants. But you have to manage your resources. The sooner you accept this fact, the better you can control your impulses towards avoidable expenditure.

After addressing all necessary expenses, you can allocate some money towards entertainment and leisure. To avoid overspending, you can create a list of groceries before visiting the departmental store. You can also assign a no-spend day in the week.

Make sure you commit to your budget. Consider it as a commitment instead of a burden and stick to the boundaries.

3. Maintain A Personal Balance Sheet

Having a personal balance sheet helps to know what you own and what you owe! It’s a pretty powerful tool to take your finances to the next level. It’s a statement wherein you can jot down your assets and liabilities. The difference between your assets and liabilities shows your personal net worth.

Before getting started, pull together your bank statements and other proofs of the liabilities. Then, list down your assets like the bank balance, investments, home value, and value of other assets. Take a sum of all the assets to arrive at the total value of your assets.

Further, list down your liabilities like the car loan, home loan, credit card balances and remaining balances in other loans. The sum of all the liabilities will show the value of the money you owe.

Ideally, your net worth needs to be positive, which means the money you own is greater than the money you owe. Don’t lose heart if it’s negative. As you keep repaying your loans, your net worth is going to increase gradually.

Yet, another critical thing in asset management is what kind of assets you need to own. You must always try to own those assets which increase in value and involve lesser maintenance cost. At the end, it’s all about how much you can really use. Simply accumulating things which you don’t need leads to blocking money in unproductive stuff. It’ll be wise to be aware of what you actually use and what you can get rid of.

4. Dealing With Surplus Cash Judiciously

How you deal with surplus cash determines your future. When you don’t have a plan, you are likely to overspend. This money could have been used to make you financially self-sufficient.

In the backdrop of inflation, everything is going to be costlier with each passing year. If you don’t invest, your money won’t grow to bridge the inflation gap. Otherwise, you might not be able to retire as you would want to.

Investing can be a great way to channelize the extra cash and counter inflation. It can be used to grow wealth and divert it to goal accomplishment. The earlier you start investing, the better. Investing can be a bridge between where you are and where you want to be.

Start with identifying goals like buying a car or planning for retirement. Categorise those goals into short-term and long-term. Goals that can be achieved within 1 to 3 years are essentially short-term. Goals that need a horizon of 3-5 years are called medium-term goals. Goals that require more than 5 years to achieve our long-term goals.

Identify your risk appetite i.e. the degree to which you are comfortable with a fall in the value of your investments. If you can digest, say a 20% fall in the value of investments, you are a high-risk seeker. Else, categorise yourself as a risk-averse investor.

Once you identify your goals and risk appetite, you can conveniently select the investment haven. A risk-seeker may go for a diversified equity fund. Conversely, a risk-averse short-term investor may go to a liquid fund or a balanced fund.

Mutual funds have come up as the most versatile investment haven. You can start Systematic Investment Plan (SIP) at a nominal sum of Rs 500 per month. Under SIP, a fixed amount gets deducted from your savings account and is invested in mutual fund scheme of your choice.

5. Create Your Personal Investment Portfolio

Constructing your first investment portfolio is an achievement in itself. After all, it is your first step towards wealth accumulation. Building a portfolio involves distributing your investment amongst asset classes like equity, debt, and cash. It is known as asset allocation.

Although equity is the best tax-efficient and inflation countering vehicle, putting all your money in equity isn’t a prudent move. You need to diversify the sums that are to be allocated in each asset class as per your investment goals. It is always wiser to be a long-term investor in order to accumulate greater corpus.

Your investment horizon would ideally be around 10-15 years. Once you have constructed a portfolio, you need to rebalance it periodically to keep the portfolio’s risk within expected limits due to market fluctuations. You can do it once in every six months or a year.

6. Planning For Retirement

Planning for retirement is important for everybody. Owing to a sedentary lifestyle, you are more vulnerable to ailments, such as diabetes, hypertension and heart attacks. Healthcare costs are increasing with each passing year. In the absence of a social security net, you need to have your own funds to fund for all these expenses.

Like many others, you might be thinking that it’s too early to start planning now. At this rate, you begin retirement planning late and accumulate a smaller amount as compared to what you could accumulate given that you started early. This is due to the “magic of compounding”. It enables you to even retire early and lead a hassle-free life.

While planning for retirement, you need to clarify a few points like deciding an age at which you want to retire. Along with that, estimate how much money you will need every month to meet your post-retirement expenses.

Suppose that you plan to retire at 60 years and your monthly estimated expenditure after retirement is Rs 50000. Assuming a rate of return of 12%, you need to contribute a SIP of Rs 2,900 every month for 30 years to accumulate a corpus of Rs 1 crore. You can easily calculate your retirement contribution using our retirement calculator.

7. Manage Your Debt Wisely

Lack of debt management may eat up a major part of your paycheck. You may end up borrowing fresh loans to pay off older loans. If it gets out of control, then you may fall in a vicious debt trap. Your critical life goals may get sidelined and even your retirement may get delayed.

Strategising your debt payment may keep you away from such troubles. All you need is being informed about how much you owe to whom. Chalk out a schedule to pay them off. In case you have a lot of debt to shoulder, start paying off the most expensive one first.

In fact, credit cards are the most expensive form of debts. As soon as your salary gets credited each month, pay off your credit card balances in full. Don’t fall for the lure of paying off the minimum balance. Even before you know, the interest will spiral up to eat out all your savings. Make it a point to use the credit card only in case of emergency.

Always keep debt as the last resort. As far as possible, make down payments for your purchases. In case you are shouldering big-ticket loans, look for balance transfer option. You can transfer your loan to another bank offering a lesser rate of interest. This method helps you save a lot of money going out as interest.

Never borrow for assets which are depreciating. Additionally, tax-inefficient loans like personal loans should be avoided as far as possible. You can think of saving and building a corpus to fulfill your goals. In this way, you can avoid falling into debt trap.

8. Get Your Risks Covered

Human life and property are vulnerable to risks. These risks can lead to loss of income and put you and your dependents in a financial jeopardy. Similar to investing for wealth accumulation, ensure wealth preservation through insurance.

Buying a ULIP is not all. You end up paying more and remain inadequately insured. Instead of this, a term insurance plan will be a wiser proposition to buy. Term insurance plan provides you higher risk coverage at a reasonable price.

Don’t expect returns from your life insurance policy. Ideally, the sum assured needs to be at least 10 times your annual income. Before buying life insurance, you can compare policies online to select the one which satisfies your requirement at affordable prices.

Apart from life insurance, you may need a health insurance as well. It will enable you to access high-quality healthcare at reasonable prices. Don’t end up shelling out more for less.

9. Planning Your Estate

Believe it or not! Each one of us has an estate. Whether it’s your vehicle or your home; the cash lying in your saving and current account, every asset constitutes an estate. It’s your responsibility to decide what happens to these when the time comes.

You need to ensure that the right asset is assigned to the appropriate individual in the right manner. Ultimately, you need to think about estate planning. Often, individuals misconstrue that estate planning is meant only for the wealthy. However, the reality is totally opposite. It is relevant for every person who can’t afford to leave his assets in the hands of the unwanted after he is not around.

Most of us might have never thought of doing estate planning. Some of us might be putting it off to a later date. But this is a wrong approach. You can start off estate planning as soon as you begin accumulating assets. You can start by preparing an inventory of assets that you own. Create a list of beneficiaries & proportion of assets that you want to allocate to each one of them.

Prepare a will which can be the best favour for your loved ones. It will ensure that the beneficiaries do not have to face challenges in order to get the ownership of assets. In case you are clueless about how to get things done, consult an experienced lawyer.

10. Planning Your Taxes

It is necessary for you to analyze your finances from a tax efficiency point of view. You are free to claim various tax exemptions, deductions, and benefits so as to reduce your tax liability at the end of the financial year.

Even though tax planning is very much legitimate in nature, you need to ensure that you don’t indulge in tax evasion or tax avoidance. There are a number of deductions available under Sections 80C through to 80U that are given in the Income Tax Act.

The most efficient way to take advantage of Section 80C is to invest in Equity Linked Savings Scheme (ELSS). It has the shortest lock-in period as compared to all the other tax-saving options available under Section 80C.

Under this section, you can save taxes up to Rs.45,000 and avail a deduction of up to Rs.1.5 lakh. Additionally, ELSS is a diversified equity fund that helps you achieve your financial goals via investment in the equity market.

Conclusion

If you don’t know where to begin from, then take advice from a reliable source. You can even invest in Mutual Funds to get the benefit of diversification & professional fund management. Investing in Mutual Funds is made paperless and hassle-free at ClearTax. The following steps can help you start your investment journey.

Step 1: Sign in at cleartax.in

Step 2: Enter your personal details regarding the amount of investment and period of investment

Step 3: Get your e-KYC done in less than 5 minutes

Step 4: Invest in your favorite mutual fund from amongst the hand-picked mutual funds