Financial planning is a systematic process that allows you to plan your finances based on your specific goals and cater to your specific lifestyle.

Everyone knows financial planning is important and it sounds really good in theory. But sometimes, it gets tricky to implement it practically given the vast range of moving pieces involved in the process. Today, we'll talk about some of the goals that one should have to start their financial planning journey to have a more structured and secure financial life:

  1. Buy Life and Health insurance: The single most important thing you can do with your money is to create a safety net for yourself. People spend years saving and investing money but tend to ignore this piece of the puzzle completely in the hope that they would never have to go through a situation that could wipe their entire savings out completely. Usually, such situations strike unannounced when you least expect it, like covid. Hence, it's important to be prepared.

    When it comes to life insurance, there are many types of options available: Endowment plan, term plan, ULIP, etc. There are multiple factors involved while buying insurance such as claim settlement ratio, number of claims applied among other factors. I'll discuss about choosing insurance in more detail in another post. But generally speaking, the younger you are when you buy insurance, the lower the premium amount you can get. Hence it's always better to get insurance as soon as you can afford to.

  2. Pay off your debt: There's a lot of dilemma around whether you should invest your extra cash or try to pay off your debt sooner since the longer you are invested, the more advantage of compounding you can take. But it's important to understand that loans depending on types will usually have a high rate of interest which means the longer you keep paying its EMIs, the more money you're losing. Hence, if you have any extra cash at the end of the month, ensure that you use it to pay off your debt first before you think about investing it. Almost all banks allow you to pay more than the monthly EMI if you want to. Use this facility to reduce your debt.

  3. Create an emergency fund: This one's a no-brainer but a lot of people don't do this. It's important to create an emergency fund to help you in dire situations such as a sudden medical expenditure, loss of job, etc. This is supposed to be another layer of a safety net (you can keep the amount in a separate account if you don't think you can resist spending it) which is readily available when needed.

    Now, what should be the amount that needs to be kept aside for this? A minimum of 4-6 months of your living expenses is a good start. So you need to calculate how much you spend on essentials - rent, food, etc. per month and 6 times that should be your emergency fund. This will provide you with another layer of cushion in case you lose all streams of income or are in any form of emergency. A lot of people even suggest keeping the amount worth 12 months of expenses. But 6 months is a good start and if you have spare cash later in life and aren't sure what to do with it, you can always add it to your emergency fund.

  4. Track expenses: Before you start investing, you need to learn to save and to find places to do that, you need to start tracking your expenses. These days, a lot of apps are available that allow you to track your expenses, but even an excel sheet does the trick well. Just create a monthly sheet with rows indicating categories and start adding expenses to it as you spend. Google sheets even gives you a template as can be seen below which can be used as a good reference. Review this sheet at the end of the month. Do it for 2-3 months and you'll start seeing patterns. The first step to save is to figure out unnecessary expenses. This exercise helps you do that and keeps you in check when you're spending as you're always aware of how much you've spent on each category in that month and allows you to think twice before spending.



  5. Budget: Once you've done the above exercise and have a rough estimate of your monthly expenses, create your budget. You can use the same sheet and add an upper cap on each of the categories and try to stick to it.

  6. Plan for retirement: Retirement planning is hard and involves so many moving variables that no one wants to think about it. But it's important to plan now to avoid problems later in life. There are multiple products available for retirement such as Provident Fund (PF), Voluntary Provident Fund (VPF), National Pension Scheme (NPS), mutual funds, etc. Read more about these products and figure out which one suits your needs best.

  7. Tax Planning: There are numerous advantages of tax planning. If you come under the salary bracket where you pay taxes, then planning your taxes at the start of the financial year allows you to not have to pay extra in taxes and wait for refunds wherein you get the money late and you lose out on time value of money as well. It also allows you to save money that would otherwise have been deducted as taxes.

    Time value of money can be understood using the following example: A Rs.100 today is better than a Rs.100 one year from now as it gives one the freedom to grow that Rs.100 in a year.

    There is enough information out there on the various ways in which one can save taxes but planning ahead is important.

  8. Set financial goals: Now that we've discussed ways on how to save money, let's talk about what to do with the money that we saved through all these steps. Letting your money sit idle in the bank ends up reducing its value as inflation eats it up, hence investing it is important. But how and where and for how long should one invest? This depends on what is the goal for your investment. You can set goals like retirement, your child's education or marriage, buying a car, or going on a vacation. Your goals can be short-term or long-term. Make a list of all the goals in a spreadsheet along with the number of years after which they need to be fulfilled and the amount you will need by that time. Based on those goals, you can now choose investment options that specifically fulfill your goal requirement.

  9. Educate yourself: Finally, keep educating yourself about personal finance, different products available in the market, stock market and macroeconomics as the more knowledge you gain, the better investments you'll be able to make.