Personal Financial Planning : 3 quick insights for new investors

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Personal Financial Planning : Introduction

A Comprehensive guide to help you manage your money and achieve your financial goals in short term as well as in longer term

Congratulations on landing a new job! You have taken an important step towards building your career and securing your future. However, with a new job comes new responsibilities and challenges, especially when it comes to managing your money. How do you budget your income and expenses? How do you save for emergencies and retirement? How do you invest your money wisely and avoid debt? These are some of the questions that you may face as a new job holder.

This document will help you answer these questions and provide you with some tips and strategies for personal financial planning. Personal financial planning is the process of setting and achieving your financial goals, based on your income, expenses, assets, liabilities, and preferences. It involves creating a realistic and flexible budget, saving and investing your money, managing your debt, and protecting your wealth. By following a personal financial plan, you can improve your financial well-being, reduce your stress, and enjoy your life.

Budgeting

The first step in personal financial planning is to create a budget. A budget is a plan that shows how much money you earn, spend, save, and invest each month. It helps you track your cash flow, control your expenses, and allocate your money to your financial goals. To create a budget, you need to follow these steps:

• Calculate your net income. This is the amount of money that you take home after taxes, deductions, and other withholdings.
• List your fixed expenses. These are the expenses that you have to pay every month, regardless of your income or lifestyle. They include rent or mortgage, utilities, insurance, loan payments, and subscriptions.
• List your variable expenses. These are the expenses that vary from month to month, depending on your income or lifestyle. They include food, transportation, entertainment, clothing, and personal care.
• Subtract your total expenses from your net income. This is your surplus or deficit. A surplus means that you have more money than you spend, and a deficit means that you spend more money than you earn.
• Adjust your budget. If you have a surplus, you can use it to save, invest, or pay off debt. If you have a deficit, you need to reduce your expenses or increase your income. You can also look for ways to save money on your fixed and variable expenses, such as switching to a cheaper plan, using coupons, or buying in bulk.

A budget is not a one-time exercise. You need to review and update your budget regularly, at least once a month, to reflect any changes in your income or expenses. As a part of Personal financial planning, you need to track your spending and compare it to your budget, to see if you are sticking to your plan or not. You can use a spreadsheet, an app, or a notebook to record your transactions and monitor your progress.

 

Insurance: Risk Management Tool

Once this was considered as fancy items but it’s no more. Insurance is more important than saving money in account for future requirements.

Insurance should be mandatory part of budget and investment planning. Medical and Term insurance is the first steps for investment planning.

Saving and Investing

The next step in personal financial planning is to save and invest your money. Saving and investing are two ways of putting your money to work for you, by earning interest, dividends, or capital gains. Saving and investing can help you build your wealth, prepare for emergencies, and achieve your long-term goals, such as buying a house, starting a business, or retiring comfortably. To save and invest your money, you need to follow these steps:

• Set your financial goals. These are the specific and measurable outcomes that you want to achieve with your money, such as saving $10,000 for a vacation, investing $50,000 for a down payment, or retiring with $1 million. You need to define your goals in terms of time horizon (how long it will take to achieve them), risk tolerance (how much uncertainty you can handle), and return expectation (how much money you expect to make).
• Create an emergency fund. This is a pool of money that you can access in case of an unexpected or urgent situation, such as losing your job, getting sick, or repairing your car. An emergency fund can help you avoid using your credit card, borrowing money, or withdrawing from your investments, which can hurt your financial plan. You should aim to save at least three to six months of your living expenses in a high-interest savings account or a money market fund.
• Pay off your high-interest debt. This is the debt that charges you a high rate of interest, such as credit cards, payday loans, or personal loans. High-interest debt can eat up your income, limit your cash flow, and reduce your ability to save and invest. You should pay off your high-interest debt as soon as possible, by making more than the minimum payments, using the debt snowball or avalanche method, or consolidating your debt.
• Save for your short-term and medium-term goals. These are the goals that you want to achieve in less than five years, such as buying a car, going on a trip, or getting married. You should save for these goals in a low-risk and liquid account or instrument, such as a savings account, a certificate of deposit, or a bond fund. You should also use a separate account for each goal, to avoid mixing up your money and losing track of your progress.
• Invest for your long-term goals. These are the goals that you want to achieve in more than five years, such as buying a house, starting a business, or retiring comfortably. You should invest for these goals in a diversified and growth-oriented portfolio, such as a mix of stocks, bonds, and mutual funds using SIP. You should also use a tax-advantaged account, such as a 401(k), an IRA, or a Roth IRA, to reduce your tax liability and increase your returns.

Saving and investing are not mutually exclusive. You can do both at the same time, as long as you prioritize your goals and allocate your money accordingly. You should also review and adjust your savings and investments regularly, at least once a year, to reflect any changes in your income, expenses, goals, or market conditions.

Debt Management

The final step in personal financial planning is to manage your debt. Debt is the money that you owe to others, such as banks, credit card companies, or family and friends. Debt can be useful or harmful, depending on how you use it. Useful debt is the debt that helps you achieve your financial goals, such as a mortgage, a student loan, or a business loan. Harmful debt is the debt that hinders your financial goals, such as a credit card, a payday loan, or a personal loan. To manage your debt, you need to follow these steps:

• Know your debt. This means that you need to know how much debt you have, who you owe it to, what interest rate you pay, what minimum payment you make, and what term you have. You can use a spreadsheet, an app, or a notebook to list all your debts and their details.
• Reduce your debt. This means that you need to pay off your debt as soon as possible, especially the harmful debt. You can use the following strategies to reduce your debt:
• Make more than the minimum payments. This will help you save on interest and shorten your term.
• Use the debt snowball or avalanche method. This means that you pay off your smallest or highest-interest debt first, while making the minimum payments on the rest. Once you pay off one debt, you move on to the next one, until you are debt-free.
• Consolidate your debt. This means that you combine your multiple debts into one debt, with a lower interest rate and a longer term. This will help you simplify your payments and lower your monthly cost.
• Negotiate your debt. This means that you contact your creditors and ask them for a lower interest rate, a lower balance, or a longer term. This will help you reduce your debt burden and improve your credit score.
• Avoid new debt. This means that you need to stop using your credit cards, avoid taking out new loans, and live within your means. You can use the following strategies to avoid new debt:
• Use cash or debit cards. This will help you limit your spending and avoid interest charges.
• Create a spending plan. This means that you allocate your income to your needs, wants, and savings, and stick to it. This will help you avoid impulse purchases and overspending.
• Build your credit score. This means that you pay your bills on time, keep your credit utilization low, and check your credit report regularly. This will help you qualify for better interest rates and terms in the future.

Debt management is not a one-time exercise. You need to monitor and update your debt situation regularly, at least once a month, to see if you are making progress or not. You also need to celebrate your achievements and reward yourself for paying off your debt.

Summary

Personal financial planning is a process that can help you manage your money and achieve your financial goals. It involves creating a budget, saving and investing your money, and managing your debt. By following a personal financial plan, you can improve your financial well-being, reduce your stress, and enjoy your life. However, personal financial planning is not a one-size-fits-all solution. You also need to review and adjust your plan regularly, to reflect any changes in your situation or goals. Remember, personal financial planning is not a destination, but a journey. On the subject of Personal financial planning, I will advise to check out the book from amazon.