10 Golden Rules for Successful Financial Planning

Financial planning is the key to financial success. It gives you a comprehensive picture of your current financial standing and helps you identify, organize, prioritize a step-by-step approach for meeting your financial goals.

What is financial planning? 

Financial Planning is the process of putting together a plan around managing your finances and preparing for potential costs and issues that may arise in the future. Financial planning helps you manage your money so you can successfully reach your life goals. 

Why is financial planning important? 

Good financial planning allows you to adopt a disciplined approach to savings, investing, accumulating wealth, and meeting your life goals. It also helps you prepare for unpredictable events, emergencies and inflation while attempting to reach important life goals.

Understanding the importance of financial planning is crucial, but most people don’t know where to begin or how to go about it. In this article, we have listed 10 golden principles that you should follow while creating a financial plan. Read on.

1. Track Your Monthly Expense

Tracking your monthly expense is a good first step. Consider how much income you generate, what are you spending it on, and then move on to how much you should earn and save to meet your future financial goals.

You need to identify your financial goals and make a list of your short-term and long-term financial goals. This will help you in determining how much you need to save for each goal and for how long.

2. Manage Your Debt Wisely

If you are bad at managing debt, you’ll be left with nothing at the end of the month, pushing you to borrow more to fulfil unmet financial obligations. Before you know it, your debt will go out of control, causing you to fall into a vicious debt trap. If you find yourself a victim of a debt trap, apply for a debt consolidation loan to pay off all your debts. This will break the debt cycle.

3. Manage Your Money

Your savings fuel up your purchases, investments and financial goals. So, a savings plan is a must. Financial experts recommend using a 50-30-20 ratio: 50% of your income on essential expenses (such as rent, transportation, food, loan EMIs); 30% on personal expenses (such as shopping, online courses); 20% goes into savings.

However, there’s no size that fits all. So adjust the ratio according to how big or small are your financial goals. For example, if one of your long-term goals is saving money to buy a home, then you need to reduce your personal expenses and increase your savings percentage.

4. Regulate Your Expenses

If you are struggling to make ends meet every month, it indicates that you are living beyond your means. Making a budget can help you regulate your expenses. Put your expenses under categories – essential and non-essential expenses. By doing so, you’ll get a correct picture of where you are spending and make corrections in your spending habits. Look for ways to reduce your unnecessary expenses or find a way to increase your income.

5. Create a Diversified Investment Portfolio

If you are on your journey to becoming financially independent, you’ll need to build an investment portfolio. To build an investment portfolio, you need to divide your investments across different asset classes, such as cash, real estate, stocks, mutual funds, etc.

Even if equity mutual funds are the best asset class, you shouldn’t invest all your money in the same asset class. A wise decision is to have a diversified investment portfolio that is a good mix of all types of asset types.

6. Keep a Personal Balance Sheet 

It’s important that you understand what you own and what you owe. Keeping a balance sheet is an excellent way of finding out where you stand financially. List down all your assets and liabilities. Your net worth is the difference between your assets and liabilities. Armed with this knowledge, you can work around expanding your net worth.

7. Use Windfall Gains Constructively

If you get a bonus/incentive, win a lottery, or inherit money, don’t spend it mindlessly. A wise decision would be to use it for something constructive. It could be used to clear your debt, make an extra payment on your loan, or build your investment portfolio.  

8. Plan for Retirement

It’s never too early to start thinking about your future retirement. If you begin early, you’ll have a huge corpus when you reach your retirement, thanks to the power of compounding. However, when planning for your retirement, decide at what age you would like to retire and estimate how much money you’ll need every month to meet your post-retirement expenses.

9. Cover Your Risks

Your life and property are always vulnerable to risks. Therefore, the focus of financial planning should not only be on wealth creation but also on wealth preservation. This means your financial plan should be a mix of instruments that help you build wealth (investments, savings, etc.) and also essentials like home insurance, life insurance and healthcare plans that cover the risks to keep you and your family financially strong.

10. Invest for your goals

A good financial plan needs you to list all your important goals. Decide how much time you have to meet each of your specific goals. This will help you figure out how much money you’ll need to invest to achieve a goal in the time period specified.

Author Bio:

Shiv Nanda is a financial analyst who currently lives in Bangalore (refusing to acknowledge the name change) and works with MoneyTap, India’s first app-based credit-line. shiv@moneytap.com.