Just like how a person cannot be happy without having air to breathe, water to drink and food to eat, it is hard to be content or happy when the lack of financial capacity to support yourself and your family is constantly nagging you. To gain the financial independence, one needs to start with financial planning to gain and then devise efficient plans for proper savings and proper investments. Read on to find out exactly how you can plan your finances, manage your money and make it work for you rather than you just working for it till your last breath.
Basics of Financial Planning:-
The earning population can broadly be divided into 3 categories:-
- The person who has just started earning, lives a free life, has no debts and is enjoying every moment of being financially sound.
- The person who’s worried about debts overriding his earnings. They have a mediocre income to complement their debts.
- The person is reeling under debts. With not enough income, this person can well be under a major financial crisis with no one to bail them out.
Regardless of which category you belong to, it is vital that you start planning your future financial well-being and start investing in your financial independence right this instant!
When it comes to financial planning, it helps to take the top-down approach, meaning, it helps to know how much money you’ll need by say 2030 so that you can start planning your finances and start investing right now in such a way that you end up having exactly that much money by 2030. Not doing this is the first mistake of poor financial planning. Most people, even though they may be efficient and disciplined enough to start saving every penny, will end up making this classic mistake if they don’t know exactly how much they’ll need by a specified date. The reason for this is that more than efficient saving, efficient investment demands clear and specific future goals. The truth about finances is that only a combination of efficient saving and efficient investment will save you and prepare you for your future lifestyle and needs.
In order to start planning your finances you need to put all the financial facts about yourself on paper. These facts include your
1) Savings, Assets & Income – The exact amount available in your bank account, other liquid assets, the value of your immovable assets, your exact salary after deductions if you’re an employee, your exact profits if you’re self-employed and other sources of income such as rent that you receive on your property, profits from trading stocks, bonds or shares and every other incoming penny.
2) Essential expenses – These include monthly bills, paying off loans, shopping, ration, transportation, education, medical expenses and everything else that you need to survive and maintain your current lifestyle. Note down these expenses per month and multiply them by 12 and add incidental expenses per year.
3) Aspirations – These may include immediate or distant aspirations such as buying that dream house, capacitating your children’s higher education without the financial constraints hindering their choice or having enough capital to start that dream business etc. Note down the amount you’ll need by a specific year for each serious aspiration that you have. Make sure that you don’t list down heavy or distant aspiration such as being a space tourist or something like that when you’re reeling in debts. You need to be practical in your choice of what you want to aspire for your life.
Yes, you need to literally put all this down on paper and know for yourself how much you’re earning and how much you’re spending. This is the first practical step in financial planning. Once you have the above information, you need to account for fluctuations in their values. For instance, you might be getting a promotion with increase in pay and thus might need to increase your annual income after a specific year or you might need to account for inflation if your aspiration is to buy that dream house. Just make sure that you know as much as it is possible to know about the details of the factors that influence inflation that are specific to your region.
Now that you have all your financial facts listed and known thoroughly, you need to start devising strategies to save and invest appropriately.
So, what is an efficient strategy for accumulating savings? A simple way could be spending on nothing more than the bare essentials required to maintain your current lifestyle, which hopefully is neither too extravagant nor too thrifty. Prevention of unnecessary expenses can in itself be a major saving strategy. Again you need to have specified goals in mind when you’re planning on saving. For instance when you’re planning on saving $400 by the next few months, it wouldn’t make sense to restrain yourself from going out for those fancy dinners every weekend when you’ll be saving much more than just $400 even if you went out for your weekend dinners. The key is a combination of thorough planning and being appropriately frugal.
If you’d like to save as much as possible, it helps to keep accounts of your daily expenditures and incomes. Just being aware of your transactions can teach you a lot of ways to save money or at least that is the first step. Once you’re aware of all your transactions, you become self-conscious about your financial capacity and it becomes easier to force yourself into saving more.
A wise tip on saving would be to cut down on your credit card usage. It does help a lot to have a credit card in case of an unforeseen emergency but it also psychologically edges you to spend more. Be very self-conscious about using your credit card!
The simple mantra behind efficient investing is this – Invest early, invest regularly and invest long-term. Whether you’re looking at mutual funds, shares, stocks, bonds, Government securities, insurance, land, property, jewelry or just about anything for that matter, this mantra generally applies; of course given that the stuff you’re about to invest in is worth investing in and isn’t going to depreciate in the long-term. If you’re just starting out your career in earning money and want to ensure your financial independence in the years to come, then this mantra is most fitting for you since it would be vital for you to start investing whatever money you have right now. Even if you have some debts and can figuratively hold your breath for a while, then it would help to invest as early as possible though it might not be best for you to invest for returns too far ahead in the future.
Broadly speaking, there are three kinds of investments worth making out there:-
1) High risk, high profit
2) Medium risk, mediocre profit
3) Low risk, low but steady profit
Investment products galore out there and it is out of the scope of this article to discuss all possible products in depth. But there is one thing that would be a good investment regardless of what type of investment you’re looking for – protection from possible losses.
When the talk comes to insurance, it is highly advisable to have your life insured with a term plan with an ADD (Accidental Death & Disability) rider from a highly rated career because you don’t want your dependents and family suffer your carelessness because you didn’t take the effort to plan for the eventuality of your death. These things are always for others till it so happens that it is your family that can possibly suffer the death of an earning member. It is best to opt for insurance plans to protect your family from your potential loss. Also term plans are the cheapest insurance products out there and they also happen to have high compensation for the insured loss.
Coming to looking at insurance as an investment option, some leading companies offer ULIP (Unit Linked Insurance Policies) that would be a really good high risk, high profit investment. Investing in ULIP is an indirect a relatively safer way of entering market investments. Just make sure that the product comes with guaranteed NAV (Net Asset Value). Guaranteed NAV provides significant protection from market risks and offers for a safe product even though it might be traditionally classified under the high risk category.
There are a multitude of other kinds of investments out there. If you know of a way of investment that you feel is neglected in this article, please share with us!
Though it might not have been the magic bullet, hope we gave you some tips to better manage your money and make it work for you rather than you having to work for it all life.
Are you on the path to your Financial Independence ? If so, please share any tips or suggestions that worked for you in the comments section.