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Get started with financial planning with our
guide on money management
Get started with financial planning with our guide on
money management
Everyone needs money and wants to spend it on their own terms, even if they cannot earn it the way they want. However, once you have your salary in hand, a number of ideas can pop into your mind and make you want to spend your money on gifts and other luxuries after you take care of your essential expenses.
This is when money management becomes necessary. Your income can do more than pay for essential expenses and entertainment. And so, with a financial plan in place, you can start saving and investing your money so that your financial management can help you create and build wealth over the years. Here is a clear outline of some money management tips and how you can go about it.
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Creating a financial plan can seem like a lot of work, but once you get started, you understand how to keep your savings and investments in sync with the plan and manage your wealth.
Make A Note of Your Financial Goals
Be it a diary or a digital notepad, create a list of all your financial goals over the years. This is what you want to achieve during the given timelines with the financial resources you will build. Then, bifurcate all the objectives into short-term, mid-term and long-term goals.
Also, list out the following questions, which will help you get a clear sense of how you want to achieve these goals. They are:
Once you are able to know these goals, it becomes easier for you to save and invest your wealth which makes financial planning more target oriented.
Create A Workable Budget
When you start creating a budget for money management, it needs to be practical so that you can follow through with it. Here is what you need to allocate your financial resources for:
You can also choose to list activities like dining out and entertainment expenses as a separate tab because these do not essentially happen on a daily basis. Instead, it is mainly household costs and other maintenance and transport costs that take up a chunk of the budget.
The total amount you get after adding all these expenses should be subtracted from the income you receive from your salary or any other monthly source of income. Then, the extra amount that remains should be saved or invested for your financial goals.
Include Debt and Taxes
Chalk out a clear plan for your debt and taxes, as these can come in the way of your savings and investments if not carefully planned. Ensure that you are able to clear your debt on a priority basis so that it does not accumulate and affect your future financial plans. Tax planning should also be on your list so that you can understand how to save money through tax deductions on various savings and investments.
Set Up an Emergency Fund
Even though you may have allocated money for savings or investments, a liquid emergency fund is purely for an emergency such as a medical contingency or a loss of income. At such times, it is best not to disrupt your savings or investments that are growing over the months. Instead, this is when you should use the accessible emergency fund, which should at least cover 6 months to 1 year of essential expenses and household needs.
Make Your Retirement Plan
Even though your retirement could be years away from today, it is important that you start planning for it soon. A lot of expenses that are currently in your life today will also continue through retirement; however, your salary will be absent. This facilitates the need for a regular income that you can use on a monthly or yearly basis. Consider inflation and all other necessary factors and ensure that this post-retirement income should at least be equal to your monthly salary, if not higher.
When you create a financial plan on the basis of these steps, it becomes easier for you to fulfil your goals and also protect your family in case of an unfortunate event.
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Here are some important and necessary money management tips that you should be aware of if you want to manage your money better:
Start off by making a list of all your financial goals and objectives. Maintaining a financial record for the coming times becomes more convenient and makes it easier for you to manage your money. Always keep the original documents of each financial document, such as your bank statements, investment account details, estate planner, insurance policy, tax exemption statement and other such papers, safe and secure. Keeping an eye on these will help streamline your goals from time to time.
It is not only enough to keep all your financial documents safe but also be aware of how much your net worth is. To check if your net worth is positive, it is essential that your assets, such as your house and investments and savings, are well above the liabilities like your loans, debts, and mortgage. In case your loans and debts are greater than your assets, then your net worth is negative, and you may need to work towards reducing your debt.
Whether you have income from a single source, i.e., your salary or multiple sources, such as business, bonuses, etc., it is important to have an expenditure plan. Such a plan will include your income, investments, savings, and expenses. Always work towards keeping your income higher or equal to your investments. That way, if you need to increase your investments later on and diversify them, you can do so easily. In addition, an expenditure plan is important as it helps you prepare for future financial emergencies.
Whenever you receive your salary or income for the month, first keep aside a designated amount for savings and then spend the rest on your household expenses, utility bills, life insurance premiums, EMIs and so on. By doing this, you are safeguarding your future so that in case of emergencies, you will not have to struggle to gather financial resources. The amount you save will depend on your income and how much you aim to save over a specific time period.
When you spend money without any plans in place, it is likely that your spending may exceed your earnings. Moreover, this will leave you without a financial support system in case of an emergency. Hence, before you spend, set your financial goals such as the purchase of a new car, retirement goals, your children’s education, your future business endeavours and so on. This can help you achieve the goals as per their given timelines while keeping you motivated and saving you from overspending.
If you are new to the workforce, you may not want to experiment with many different savings plans or put a large portion of your salary into savings. However, it is crucial to start at least a small savings plan right away at a younger age and slowly work towards increasing this amount each year and later, every 6 months, instead of waiting until you earn more. When it comes to savings, a longer tenure means a greater future financial corpus.
Much like savings, investments also need time to grow so that you can earn better returns and also benefit from compound interest. While you may be apprehensive about investing at a young age with less experience, investment plans like Unit-Linked Insurance Plans are quite flexible and can cater to the needs of different investors. As a young professional, select a long-term investment that suits your goals and budget and start investing a small sum of money regularly, which you can gradually increase over the years.
Apart from your savings and investments, it is always advisable to have an emergency fund in the making, one that will help you keep your family secure in trying times. A life insurance policy can be one such plan that will not only help your family secure in your absence but will also make your investment in it worthwhile, as you are assured of the support they will receive. Moreover, insurance plans are flexible, and you can compare and choose a suitable one.
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Though financial planning is important for everyone, women are making financial planning an important part of their life as compared to 10-15 years ago. All one needs is some guidance and creating a financial plan becomes a smooth process. However, there are still many women who are unable to start with financial planning, either due to a lack of knowledge or because someone else does it on their behalf. Hence, let us look into the importance of financial planning for women.
There may be many reasons why a woman may choose to take a break from her work. Be it her health or some other commitment; a career break may be necessary; however, it also means that she cannot enjoy a steady income like her salary. To ensure that this time period does not present financial distress, plan ahead and ensure that you have enough funds for your needs.
For many women, marriage and parenthood become two major events during their lifetime, which means they also become financial milestones. Given how financially independent women are today, their financial contribution to their wedding and their children’s care plays an important role. This means there should be a financial plan in place to handle these commitments.
Emergencies can be difficult to tackle, especially if you do not have an emergency fund or a financial support system. Therefore, be sure to include savings or investments for an emergency fund in your financial plan that can help you out in case of a medical event or an accident during which you may not be able to earn and support yourself and your family.
Upgrading your skills is essential at any point in your career. Whether you are looking for a new job or switching industries, you may want to undertake some educational courses or skills training for better prospects. And for this, it is important that you have some financial resources at hand.
The main reason you should handle financial planning by yourself is to gain control over your finances. By doing this, you achieve financial independence and can take calls on how much you would like to save, invest, or spend.
Apart from all the reasons given above, women should be financially independent because it not only helps them provide a good life for themselves and their families but also gives them a sense of accomplishment and boosts their self-esteem.
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What are some simple ways to manage money?
Some of the simplest ways to manage money are to keep track of your expenses, start saving money in savings plans and other avenues and ensure that you are regularly building an emergency fund. For example, to keep a check on your expenses, you can write down each and every expenditure, and as for savings, you can look into savings insurance plans that not only allow you to save your money systematically but also offer your family financial security.
What are the mistakes to avoid in money management?
Here are two common mistakes that you should avoid in money management – ensure that your expenses never exceed your income and do not make any investments without first researching them.
Do I need a financial advisor to manage my finances?
Financial management at a personal level is not difficult, and you will not need an advisor to take care of your daily expenses or guide you on your income and expense ratio. However, when it comes to savings and investments, especially the latter, you should seek help from a financial advisor before making an investment.
Is life insurance part of money management?
Yes, many people choose to have a life insurance policy, be it simple term insurance, a savings policy, or a Unit-Linked Insurance Plan, as part of their financial plans. This ensures that you are regularly investing some part of your income in protecting your family’s financial future.
Can a savings plan be part of my financial planning?
Of course! A savings plan can be a good option for financial planning as you can save a designated sum of money in a regular and systematic manner over the policy term. Moreover, the policy will also protect your family with a life cover that will offer financial assistance in case of your untimely demise.
Are savings and investing necessary for managing finances?
Most certainly! Savings and investments ensure that your money is growing by garnering interest during the tenure. By setting aside money for your savings and investments, you can not only build a financial corpus for different goals, your future and for emergencies but also plan your expenses better. When you receive your salary or income, make it a point to first save or invest some portion of the money before you start spending on your daily essentials.
What are some tips to keep in mind for managing money?
Here are some basic tips to remember for money management:
Will excessive debts be bad for money management?
Yes, if you have too much debt and are dealing with several loan repayments, there is a narrower scope of saving or investing any money. Over a period of time, not only will this affect your credit score, but it will also take a toll on your essential expenditure, which can lead you to take more loans. One way of avoiding such a situation is to create a savings fund in advance for your goals so that you do not have to take a loan unless it is absolutely necessary.
How can I plan a realistic budget?
A realistic budget is one in which you are aware of how much you should spend or save in comparison to your earnings. Make a note of your actual monthly expenses instead of a vague estimation so that you can save a fixed amount of money each month. If needed, split all your expenses into smaller tabs to get the exact idea of your expenditure. While setting a realistic budget, it is important that your expenses do not exceed your income.
Is it necessary to set financial goals at every life stage?
Absolutely! Since you and your family’s financial needs and goals will keep changing over the years, it is important that you set and reset your financial goals from time to time. Some of these goals will be specific to a particular timeline, such as the purchase of a new home, raising and educating your children or taking care of your aged parents. This is why financial goals can change as per your life stage.
Will money management help me plan my retirement?
Yes, you can manage your savings and investments well in advance and set aside a retirement fund at least 10-20 years prior to your retirement. By planning your retirement, you can ensure a steady flow of income for yourself and your family’s various needs during a time when you will not be supported by a monthly salary.
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