Personal financial planning is a process that involves evaluating your current financial situation, setting financial goals, and developing a plan to achieve those goals. It involves creating a budget, managing debt, saving for emergencies, saving for retirement, and investing wisely. In short, personal financial planning encompasses everything that involves money.
While there are many strategies for personal financial planning, the following are some of the most effective:
Evaluating your current financial situation
Personal financial planning begins with evaluating your current financial situation. This involves analysing your income, expenses, debts, and assets. This gives you a clear understanding of where you stand financially. You can develop a plan on your own, take help from a financial planner, or use a sound personal financial planning tool or platform. Planning your personal finance is important because it can help you reach your financial goals effectively whether they are big or small.
Setting financial goals
After assessing your financial situation, set realistic and “SMART” financial goals. Financial goals should be Specific, Measurable, Achievable, Relevant, and Time-bound. These goals can include paying off debt, pursuing higher education, buying a car or a house, or starting your own business. Everyone has different financial goals and to accomplish yours, it is up to you to develop and follow a financial plan.
Another important aspect of setting financial goals is understanding your needs and wants. A need is something necessary to live and function. A want is something that you desire, and it can improve your quality of life. For instance, during colder months, you need a coat to keep yourself warm. That’s a need. If you also want to look “cool” while staying warm and desire to purchase a stylish and luxurious winter jacket, that’s a want. A less expensive and good quality coat would also keep you warm. So, only you can decide what goals to pursue.
Creating a budget
Creating a budget based on your income is an essential part of personal financial planning. A budget is a plan that outlines how you will spend your money. To create a budget, start by listing your income and expenses. Divide your expenses into fixed and variable categories. Fixed expenses are those that do not change from month to month, such as rent and EMI payments. Variable expenses are those that change from month to month, such as groceries, entertainment, or travel. Once you have listed all your expenses, subtract them from your income to determine your net income. This will help you determine how much money is left after paying your expenses. This also helps you to analyse your expenses and keep a tab on your spending. The key is to implement a budget and stick to it.
Managing debt
Managing debt is also a crucial part of your personal financial planning. It involves listing all your debts, including credit cards, loans, and other liabilities. Determine the interest rates, minimum payments, and due dates for each debt. Prioritise paying off high-interest debts first, as they will cost you more in the long run. Consider consolidating your debts into a single payment or negotiating with your creditors for lower interest rates or restructured payment plans.
Building an emergency fund
An emergency fund is reserve money set aside so that you can use it to cover unexpected expenses, such as a medical emergency, job loss, vehicle repair, or home appliance repair or replacement. Building an emergency fund is an essential part of personal financial planning. As your emergency fund, save at least three to six months of living expenses. Start by setting aside a small amount of money each month and gradually increase it until you reach your goal. It is a safety net for any unforeseen or unplanned situations or requirements.
Saving for retirement
Saving for retirement is another critical component of your personal financial planning. Start by determining how much money you will need to retire comfortably. Also, consider the age at which you want to stop working full-time. Consider your current lifestyle, expected expenses in retirement days (keeping in mind the inflation rates), any other sources of income, your future lifestyle, and how you want to spend your time like enjoying any hobby or sport, for instance. Determine how much you need to save each month to reach your retirement savings goal. Consider investing in retirement products, and contribute as much as you can afford.
(The writer is the leader of financial wellness at AscentHR)