Seven steps to managing your personal finance
A good financial plan starts with awareness and understanding of the basics like risk, return, liquidity, taxes, etc. So, it is always good to know what these concepts are and how they apply to your life. The financial plan is also specific to each person because the needs and goals of Person X cannot be the same as those of Person Y. So, ask yourself three questions before you start creating your financial plan.
First, how long do you make this financial plan? (For example, is this to plan your retirement, which will be in the longer term, or to start your business after leaving your job, which may be relatively shorter).
Second, is your family included in this financial plan? (As we progress through our lives, some of us choose to get married and have children. So, how broad is your financial plan and does it include benefits for your family?)
Finally, and most importantly, what is your risk/return profile? (Risk return is usually understood as the amount of risk you are willing to take to achieve a target rate of return; some of us prefer to take less risk and therefore the safety value of our capital, and others are willing to take on higher risks with our capital in search of higher potential returns.)
Once you’ve comprehensively answered the questions, these are seven steps in financial planning:
1. Income: Make a list of all sources of income, from salary to income from investments (including basic things like interest on bank savings accounts, fixed deposits, etc.)
2. Expenses: Make a list of all the expenses and categorize them on the basis of recurring and non-recurring, or basic and lifestyle – choose the classification that suits you. So the recurring (or primary) would be an expense on, say, rent, groceries, etc., and the non-recurring (lifestyle) could be, say, vacations, indulgences, gadgets, etc.
3. Savings: Warren Buffett famously said, “Do not save what is left after spending, but spend what is left after saving.” Thus, after making a list and estimates of your income and expenses, you will get a fair idea of how much you are saving. Your savings rate should align with your goals, otherwise you will eventually have to adjust either of them.
4. Emergency group: This is an important aspect of financial planning because an emergency kit helps you weather tough times. Depending on your needs and desires, you should set aside an amount of money for emergency expenses.
5. Insurance: Medical (health) insurance is essential to all of us, and life insurance is critical to replacing the income of dependent people on ours. Choose coverage according to your specific needs.
6- Investments: Once you have sorted the important aspects like savings rate, insurance, and contingency group, you are now ready to plan your investments. This is where the risk profile, return and liquidity requirements will come in handy, for example, if you have very low risk appetite, you should be careful about allocating your money between equity and debt. Or, if you need to plan for a short-term goal (for example, a vacation abroad), you should invest in the right tools for that time frame.
7. Asset Allocation: Experts believe that portfolio returns are highly dependent on asset allocation. Thus, instead of being obsessed with finding the next multiple broker, understand how to allocate your capital across different classes of assets (such as equity, debt, etc.).
These seven steps are general pointers on how to start planning your money. Remember that a financial plan is not a fixed document, so keep reviewing your financial plan every quarter to ensure that your goals and asset allocation are aligned. Major external events (such as a stock market crash or a change in tax policy) and internal events (a life event such as getting married or having children) can have a significant impact on your financial plan. Finally, always consult a financial advisor for help and guidance in developing your financial plan. All the best for your trip!
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