Starting as a first-time earner, what you need first is a plan for your finances.
Financial planning is a step-by-step approach to meet your financial goals. It helps you to manage, organize and control your finances and guide you throughout your financial journey.
For example, if you need Rs 5 lakhs for your wedding next year, then you must plan your finances in a way so that you can save up for it in a systematic and organized way. This is where financial planning becomes essential.
So let's understand the 10 golden financial planning rules that can help first-time earners like you to smartly manage your money:
- Money Management: Managing money is not rocket science, and it is not necessary to have a financial background for it. Some daily commitments are all you need. Deciding how to save is the first step towards money management. Saving money can help you towards greater financial independence. Everyone has financial goals in their mind, like buying a vehicle, the latest smartphone, or a house. But where will it come from? Savings! You can achieve your financial goals promptly if you save in a systematic approach, and the best way to start doing it keeping a part of your salary devoted to Investments, mutual funds, stocks and
- Keep a Check on Your Expenses: If you live from paycheck to paycheck, you will find yourself struggling for money before the month ends. Why? Unplanned expenses! But there's always a way out. Make a budget. Unless you have a budget in place, you won't control your costs. A budget shows you how much money you have coming in and how it is spent. You can also create a hierarchy of needs and decide which expense to address first. It's all about prioritizing. The sooner you act on it, the better you can control your impulse purchases and avoid extra expenditures.
Read more: Fundamentals of Budgeting
- Maintain a Sheet: Having a balance sheet helps you know what you own and what you owe! With this practice, you can jot down your assets and liabilities, and the difference between them shows your personal Net Worth. Take a sum of all the assets and liabilities like the car loan, home loan, credit card balances, and other remaining debt. The sum of all the liabilities shows the money you owe, and the asset sum shows the money you own. It is wise to be aware of what you use and what you can get rid of, and by making this sheet, you can simplify that.
- Manage & Build Your Surplus Cash - How you deal with your surplus cash determines your future. When you don't have a plan, you indulge in impulse buying. If you do not invest, your money won't grow. Investing can be a great way to manage the extra cash, which can boost wealth and achieve your goals. The sooner you start, the better. Start with identifying and categorize those goals into short-term and long-term, and mid-term goals. Post this, analyze which investment options work best, and help you achieve the timeline set for it. Ask for financial advisor help if you are unable to decide.
- Create a Portfolio: This is your first step towards building your wealth. Building a portfolio consists of dividing your investment amongst asset classes like equity, debt, and cash, also known as asset allocation. However, one should not put all his money in equity, and we do not recommend it as a suggestive move. Diversify and classify each asset class as per your investment goals. Once you have made a portfolio, you will need to re-evaluate it frequently to keep the risk within expected limits. You can do it once or twice a year.
- Retirement Planning: Planning for retirement has become more critical than it was a few years ago. Healthcare costs are rapidly increasing with each passing year, and with an absence of a social security net, one needs to have his/her funds to tackle all these issues. Unstructured retirement planning can never let you retire peacefully. The sooner you start, the richer you retire. How? The 'Magic of Compounding'. Decide an age when you want to retire and estimate how much money you need every month to meet your expenses post-retirement.
- Manage Your Debt - Lack of debt management can eat a significant part of your paycheck. You may end up borrowing more loans to pay off older ones. Your critical life goals can get sidelined, and your retirement will get delayed. Thus, strategizing your debt payment is essential. It would help if you were informed about how much you owe to whom and then plan a schedule to pay them off. Start by paying off the most expensive ones. Use a credit card only in case of emergencies. Always keep debt as a last resort.
- Protect Yourself Against Risks: Realize that your life and properties are vulnerable to threats. Insuring is essential for wealth preservation. People buy ULIP and think that is it and then end up paying more and remain insured. Instead, buy a term insurance plan which provides you higher risk coverage at a reasonable price. Before purchasing any insurance, always compare policies online to select which satisfies your requirement at affordable prices.
- Estate Planning: Whether it's your vehicle or your home, everyone has some estate with them. Our responsibility is to decide what happens to these after you leave this world. In comparison, most of us have never thought of doing estate planning. Some of us might be delaying it. But this is a wrong approach. Create a list of beneficiaries & the proportion of assets you want to allocate to your family. Make a will and ensure that the beneficiaries do not have to face challenges to get ownership of it. Consult an experienced lawyer.
- Tax Planning: Even though tax planning is legitimate, see that you don't indulge in tax evasion or avoidance. The most efficient way to take advantage of Section 80C is to invest in Equity Linked Savings Scheme. It is a diversified equity fund that helps you achieve your financial goals via investment in the equity market.
Read more: 10 Income Tax Planning Tips for Salaried Employees
Financial planning is the first step in wealth management. So if you have just started earning then now is the time to invest your time in it and save money for the future.
(Check out 'Learn & Grow with Wizely' 'to read and learn all about personal finance and financial planning.)