Financial planning is establishing a framework for accomplishing your life goals in a systematic and planned manner while avoiding surprises and shocks. It has goals, including mutual funds, determining capital requirements, formulating financial regulations, and ensuring that limited financial resources are used to their full potential.
It isn’t easy to instill the practice of financial planning in young adults. However, when they volunteer to arrange their finances, they are unsure of where to begin.
Here are 5 golden guidelines to follow when it comes to financial planning.
Control Your Financial Goals
If you don’t learn to master your money yourself, others will find ways to do so. Some of these persons may have terrible intentions, such as fraudulent, commission-based financial advisers. Others may be well enough but unskilled, sincerely wanting you to acquire a home even if it means taking out a dangerous adjustable-rate mortgage.
Instead of depending on others for financial advice, take control of your finances by reading a few fundamental personal finance books. After you’ve gained knowledge, don’t let anyone catch you off guard—whether it’s a significant other who is systematically draining your bank account or friends who want you to go out and spend a lot of money for them every weekend.
Maintain Lifestyle Inflation
People are more willing to spend money when they have more of it. “Lifestyle inflation” refers to the tendency for people’s expenditures to rise as they advance in their careers and earn higher salaries. Even if you can keep up with your payments, lifestyle inflation can be costly in the long run since it limits your ability to build wealth. Every dollar you spend now will leave you with less money later in life and in retirement.
The drive to keep up with the Joneses is one of the reasons many people enable lifestyle inflation to wreak on their wallets. It’s pretty uncommon for people to feel compelled to spend the same way as their peers and coworkers.
Open a PPF Account
SIP, on the other hand, arrives later. To begin, open a Public Provident Fund account. You can earn 7.1 per cent interest while also assisting you in meeting your tax-saving goals after each fiscal year.
A PPF account can now be funded with a minimum of Rs 500 and a max of Rs 1.5 lakh every year. A PPF account matures after 15 years, at which point you could either withdraw all of your money or extend the account for five years at a time.
Create a Savings Portfolio
The next phase in financial planning is establishing a savings portfolio after determining your goals and risk tolerance. A diversified portfolio should comprise a variety of savings vs. investment vehicles such as stocks, bonds, gold, real estate, and fixed deposits, among others.
The basic goal of a diversified portfolio is to spread out the risk associated with different investment vehicles. Some investing instruments are more liquid than others. We will be able to withdraw funds from liquidated investment vehicles in an emergency.
Calculate Your Asset Allocation
After evaluating the risk-return portfolio, the investor can design our asset allocation approach in investment planning. The investor can choose from various asset classes accessible in the finance sector and deploy assets to create maximum diversity while achieving the desired returns.
Based on the volatility of their portfolio, the investor can assign a percentage to different asset classes such as stocks, gold, real estate, bonds, and so on. Their present financial status and objectives determine the investor’s asset allocation strategy.
As previously said, proper investment planning can help us make sound investments. If we don’t have time to complete our own investment planning, we can employ a financial planner. They will help us build an investment portfolio that is tailored to our risk tolerance and current financial condition.