As you start out your career, it becomes very important that you are aware of the steps in financial planning. How you manage your money is very important. If you do not know how to manage money, you will be in financial trouble.
This article is for the young adult who is just starting out their career. Financial planning includes borrowing money, buying houses, buying cars, paying student loans.
Financial planning also includes budgeting your daily expenses on grocery and food. Saving and investing money. It also includes Risk associated with your money.
There are lots of financial decisions we have to make in our entire life period, So it is very important that you know the basics of financial planning.
7 Steps in your financial planning
Set your financial goals
Setting goals are important in every walk of life. We set goals to have a clear idea of what we want to achieve in our life.
Similarly for your finances, setting goals helps you achieve your financial goals. Your goals can be anything from buying a mobile to buying a house for yourself. Your financial goals could be for your children’s college education.
To achieve the goals you first have to set goals. Your Goals can be short term and long term goals. Short term goals are goals you set for your short term needs or wants. Long term goals for your long term needs and wants.
You also set financial goals for your emergencies. Your emergency financial goals include saving for your emergencies. Emergencies can be anything be it your job loss or health emergencies.
Assess your current financial situation
Do you know what is your worth now? Here worth means your net worth. Your net worth will determine what you actually own.
Net worth is calculated by subtracting your liabilities from your asset. Liability is everything you owe, an asset is everything you own.
Calculating net worth gives you a true picture of your current financial position.
Once you have a clear idea about your true financial position, now you will be able to create your financial planning accordingly.
Make it your habit to Calculate your net worth on a regular basis. Try it every month or every 6 months.
Steps to calculate your Net Worth:
Step1: Write down all the things you own(Asset)
Step2: Write down all the things you owe(Liabilities)
Step 3: Subtract your owing form owning, it will give your net worth
Note: While calculating your personal net worth, always take the market value price of everything, not the purchasing price. Market price gives you a more accurate picture.
To build wealth your aim should always have increased net worth. Make it your habit to calculate your net worth on a regular basis.
Create a budget for yourself
We create a budget to keep track of our expenses. The budget gives us the idea of how cash is flowing into our lives. Budgeting also gives us the idea of surplus and deficits.
What surplus is?
When our income exceeds our expenses it is called a surplus.
What is a deficit?
When our expenses exceed our income then it is called a deficit. Deficits are considered bad in personal financial terms. Deficits happen only when you spend more than you earn. And it is never good to spend more than you can. If you spend more than you can earn then you will always be in financial trouble.
Steps in creating a budget for yourself
Step 1: Write down all your income( Cash inflow)
Step 2: Write down all your expenses( Cash outflow)
Step 3: Subtract outflow from an inflow
If the value is positive you are in surplus. If it is negative you are in deficits. Always try to have surplus cash flows.
Develop saving habits
Saving is most important when it comes to building wealth. It creates starting capital for you. To multiply your money you first need money.
There is a saying “Anything multiplied by zero is zero.”
Early you start saving, more opportunities will come to you to invest your money. And once you start investing your wealth starts growing.
Saving is best done when it is done automatically. To make your savings automatic, start a recurring account with your bank. Whenever you receive a paycheck, your money will automatically be deducted and transferred to your recurring account.
If you are not comfortable with a recurring account then follow bucket strategies. In which you create a specific bucket for your specific goals like your expenses, saving, emergencies, and expenses.
What are the barriers to saving?
When we have money in our hands, our desires start surrounding our minds to buy new things that may not be necessary.
It is difficult to control our desire. Our desires are responsible for over spendings.
We, humans, are emotional creatures, our emotions come out quickly when we are in shopping malls. We try to buy anything that looks nice and is on sale.
Emotional spendings often lead to poor financial decisions. Sometimes we buy something that we do not need much, we just buy it to show off.
Avoid buying things on credit
This is an era where every financial institution is pitching you to buy things on credit. They are posing as your friend that helps you in need, but they are not your friends they are your enemy. They are making profits with your money and pushing you to work for them.
How do you work for them? Once you buy something on credit, you will work day and night to pay your creditors. And you also have to pay interest to them.
I am not stopping to use a credit card. Use only where it is for your advantages. Use it for building your credit score. For this, you purchase only which is interest-free, and paid credit card bills on time.
Before Taking credit always remember “ Borrowers are the servants to the lenders.”
Start Investing as early as possible
Investing is the only way to build wealth for yourself. Investing works on the principle of money making money. Here money is working for yourself.
In investing, magic happens when compounding starts working in your favor. Compound interest is considered the eighth wonder for yourself.
Early you start investing more money you will make. You can read why you should start investing your money.
Reduce the risk by taking health insurance
We live in a society where medical expenses are inflating every year. Your whole finances will be destroyed if you fall into some medical problems.
Today it is necessary to have health insurance for yourself.
Never delayed medical insurance by saying that nothing will happen to me. Anything can happen to anyone. So insure yourself before something happens.
An individual’s financial planning plays an important role in our life. Everything we do requires money. And when we have money, then it becomes our responsibility to manage and control our money.
When money comes into play, financial planning plays a major role.
For you people, learning the basics of financial planning and applying in their finances will help you become more financially confident.
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