Effective Personal Financial Planning for Beginners

Introduction

The sudden outbreak of the coronavirus in 2020 made people realize the importance of maintaining their money. It also encouraged them to use it better in case of emergencies. Personal financial planning is one way in which you can do this.

What is personal financial planning?

Personal Financial Planning, therefore, is a wide term that simply means managing and investing your money carefully. Likewise, when you are a student and you have your whole life in front of you, the endless list of wishes makes it hard to save money. But at the same time, learning budgeting, banking, and Investments at the right time only help you to have a financially more safe and secure future.

Similarly, the right ways of money management brighten not only your future but also make you attain satisfying financial freedom in your present. Therefore, the sooner you realize your financial goals, the earlier you can start financial planning.

As a result, you set a standard for your financial aims and lay out a plan to achieve each of them. This eventually keeps you out of debt. Meanwhile, money-saving systems also prevent you from going broke during sudden difficulties. Therefore, to make you understand all the stages of personal financial planning, we have sorted out some of the most basic yet important strategies that can help.

Personal Financial Planning
January 13, 2022
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Table of Contents

Importance of Personal Financial Planning

Personal financial planning involves a lot of steps that you must take to achieve it successfully. But before I go ahead to define the central segments of effective budget setting and money management, let me give you a clear lookout as to why it is important to do personal financial planning from a young age.

1. To avoid going bankrupt

No matter how much we go around and say that money is not important, ultimately, no one wants to be poor. Imagine waking up a day to find that you have lost all your wealth. That did not sound great to you? Isn’t it. Having financial security, therefore, is very important for your future.

2. Increase your savings

It does not matter how much you earn, ultimately if you are not able to save even 10% of your earnings in a month then it is of no use. That is why budgeting and personal financial planning is important. It not only helps you to spend your money more carefully but also enables you to track down where your money is mostly spent in a month. Although it is possible to save money without having a proper financial plan but having your money matters sorted beforehand only helps to increase your savings.

3. To elevate your standard of living

They say that you cannot live a rich life by having a poor mindset. When on one hand most people believe that to achieve a high standard of life they have to sacrifice a lot. On the contrary, it is not true. In fact, it is possible to live a good life by only saving a bit of what you earn. A good personal financial plan helps you to do this without making any compromises.

4. Prepares you for emergencies

Personal financial planning is the best way to save yourself from unexpected disasters. Thereby, whenever any unforeseen accident happens you don’t have to worry about taking a loan or borrowing money from a friend to help yourself. Emergency funds that you have gathered for at least a time of six months are enough to treat all kinds of financial emergencies including a sudden job loss. Additionally, they help you to pay the medical bills of your loved ones in case of accidents and injuries.

5. Peace of mind

Have you ever gone broke near the month end? Did you ever feel like the world is ending when you did not have enough money to pay your monthly loan interest? These situations, no doubt have the ability to cause a lot of frustration. That is why personal financial planning is so important. Likewise, when you make the financial plan and execute it, you have a lot of peace of mind. Hence, it leads to effective money management leading to savings that ultimately protect you from undergoing this frustration.

Therefore, to make you understand all the stages of personal financial planning, we have sorted out some of the most basic yet important strategies that can help.

Read More – The Importance of Financial Planning for Small Businesses

Process of personal financial planning

1. Budgeting

Making a budget is the most important factor of financial planning. Now, what is really meant by a budget? It is simply a way of telling your money what to do each month. Likewise, this includes deciding a calculated ratio of the amount of money that you will spend to the amount of money that you will save each month. The 50-30-20 budgeting rule is the most famous framework that helps you to classify your money based on your needs.

According to the 50-30-20 rule:

  • 50% of the amount you earn is spent on essentials. For example, Groceries, rent, bills, etc.
  • 30% of your money goes into things that are not really a necessity but occasional expenses. These can include dining out with your family, shopping, maybe a movie with your friends, and even charity works.
  • The last 20% is what goes into your savings account.

This money is saved for:

  • Your retirement,
  • Clearing out future debts
  • And can also be used during financial emergencies.

Accordingly, budgeting gives you a clear picture of how to spend your money in the best possible ways. Moreover, the best way to make a budget is on paper. However, it is very important to know that once you make a budget you may fail initially to follow it. Henceforth, if one plan does not work for you then you can change it with your changing income. Ultimately, trial and error is the only way to master the art of budgeting.

2. Investing

Investing your money is initially a risky process. But as more and more people are becoming aware of making proper investments, it has become a major need in everyone’s life. Investment, therefore, is nothing but simply spending your money to earn more money. However, it requires enough knowledge about assets that you can invest in to get the most profit out of them.

Henceforth, there are many online platforms and ways in which you can start investing. These range from cryptocurrencies to stocks.

Here is a list of ways to start investing as a beginner:

  • Stocks
  • Bonds
  • Mutual funds
  • Real estate
  • Private companies
  • Commodities

Lastly, it is said that investing your money in the right way is a part of the Millionaire Mentality. By saving your money you are just protecting what you already have but by investing it, you are putting it to work. Finally, it leads to the generation of a passive income by money multiplications.

3. Emergency funds

They say that life is unpredictable. You never know what is stored for you in the next moment. That is why always being prepared for the worst is the best thing that you can do for yourself. Creating an emergency fund, therefore, is a vital step towards personal financial planning. Additionally, emergency funds also help you to get through sudden destructive events that may cause great danger not just on your mind but also in your pocket.

Some examples of emergencies include:

  • A big car accident
  • Medical emergencies like a heart attack.
  • Sudden damage to property due to climatic changes. For example, falling off a tree on your house roof.

Therefore, experts recommend that at least 20% of the total of your earnings should be left untouched just for emergencies.

4. Keeping yourself out of debt

Debt, a four-letter word that defines the act of borrowing money from an individual or an organization. There is not one but many ways in which smart personal financial planning can keep you away from debts. Firstly, you will manage your money in a way that during emergencies, no possibility of taking any loans would arise. Secondly, budgeting and cutting down extra expenses when you have taken a loan already is a method to help you repay that loan in a shorter period. Consequently, bigger debts like home loans and car loans can become a huge load when you don’t know how to manage your expenses. That is why managing your personal financial expenses is a great way to keep you out of debt.

5. Insurance

Have you ever got phone calls asking you to take insurance? Are you also tired of those irritating repetitive reminders that regularly ask you to take the insurance policies? Well, what if I tell you that they are one serious part of practical personal financial planning. This is because no matter how much financial planning you do if you are not properly insured then all of it goes into vain.

And after all, not all accidents can be predicted. Therefore, preparing for them as early as possible is what keeps you and your family safe in the long run. Besides, there are many insurance policies in which you just pay a small sum of money for a set time. Following this, you can avail of that money during the onset of mishaps.

Some insurance policies that you can take are given below:

  • Life Insurance
  • Motor insurance
  • Health insurance
  • Travel insurance
  • Property insurance
  • Mobile insurance
  • Cycle insurance
  • Bite-size insurance

Moreover, there are two types of insurances; short-term and long-term which one takes depending upon the need. Permanent Life Insurance, however, costs more than short-term policies.

6. Plan your retirement

Are you thinking about saving money for your retirement only when you are about to actually retire? Well, it is a fact that most people do not plan for their retirement until the time for them to finally give up their job comes. And let me break the bad news to you, that is where almost 70% of the Indian population goes wrong. In your early adulthood, you think that it is time for you to have fun and you end up wasting a hell of a lot of money that could be used in the future. That is why most people find themselves in a troubled condition after they retire.

Now, you may be thinking that any good job offers a pension. But that too is not correct. Because first, the company you work in does not guarantee the certainty of providing you with your expected pension money. And second, delaying the process of saving money for your retirement will only cause you to miss out on the benefits of compound interest.

Henceforth, saving each month right from the time you start earning to have a happy retirement is the last but the most important step of personal financial planning.

Need for personal Financial planning: How to start earning as a Student

If you are a student and you are looking for opportunities that can help you earn some money then you can sign up as an expert on Chegg. It is an e-Learning platform that enables students and professionals to make a side income by answering questions that are present on the portal. For this, all you have to do is follow three easy steps for signing up, following which you can solve student queries and earn money for yourself. The best part is that the payment is made based on the number of questions that you answer. This means that the more questions you answer, the more money you can make. In fact, online tutoring on Chegg is one of the most convenient and hassle-free jobs that only requires your knowledge and a little time needed for answering. 

Final Thoughts

Personal Financial planning is no doubt one of the most crucial components of proper money management that should not be ignored. Along with managing expenses, it also teaches you a lot about the careful saving of money. Additionally, you get hands-on experience in budgeting and investing systems that not only add to your savings but also multiply your wealth. Similarly, early education about taxes and loans becomes a notable step towards improving your lifestyle and standard of living because of personal financial planning. 

Meanwhile, setting the correct financial goals and defining your targets only pushes you to work harder to accomplish them. In conclusion, it is the best way to live a respectful life in the long term without bothering anyone for your expenses. 

Let me give you a short example, everyone has travel goals, right? What’s your travel goal? I’ll tell you mine, I just wish to visit Disneyland someday. Now imagine this from my viewpoint. Right now, I don’t have enough money to even travel to the next town but if I start personal financial planning from today itself then who knows maybe someday, I would actually achieve that goal. Similarly, if you are in your young adulthood then you should totally make a solid financial plan and follow it to finally live the life of your dreams one day!

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