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Creating a Financial Plan/Budget

Each year is filled with new challenges that we have to overcome, learn from, and move forward. Therefore, it is a good idea to review our financial decisions from last year based on our current financial situation and the market environment. Learning from past financial decisions can help us make better financial decisions in the future.

In recent years, financial planning has evolved overall, and more people are recognizing the importance of having a long-term financial plan. Today’s digitally-savvy generation prefers to manage their finances using digital platforms or apps. A one-stop solution that allows them to plan, manage, grow and address their financial needs. Millennials seek a greater degree of financial freedom, which also contributes to this trend.

How to Plan Your Finances

Financial planning plays a pivotal role in allocating funds to the best-suited investment vehicle to add value to your overall financial portfolio. It is the perfect time to reflect on your financial practices for the previous year and get started thinking about your financial journey in 2023.

The process of financial planning should be viewed as a scientific approach to achieving life’s milestones rather than treating it as an ad hoc process just to save maximum tax in the financial year. The purpose of creating a financial plan is to understand your financial situation, prioritize your objectives, achieve your goals, and maintain stability even through tough times.

Here are a few thought starters that can help you with this journey:

Set a budget

Setting your budget requires knowing what goals to prioritize. The first step you need to take is to analyze where you stand in terms of income and expenses as this will help you allocate your funds efficiently. You must undertake a new budget preparation activity annually, considering the current scenarios, and this annual budget can be broken down month-wise for ease of planning.

By following a set budget, you will be able to evaluate your spending behavior and help you eliminate unnecessary expenses.

Invest at an early age

As soon as you earn your first income, you should make it a habit to invest it for a higher return. It is essential that you begin investing early so that you can take full advantage of the power of compounding, which has the potential to help multiply your returns exponentially over time.

Assessing your risk appetite

You should determine your investment capability, choose the right assets, and allocate your investments accordingly. Then, even if your investments did not perform well, you would not have to worry about financial burdens.

Monitor discretionary expenses

It is crucial to bifurcate your expenses into essential and non-essential. You might want to spend on high-end items; however, it is necessary to plan these expenses systematically. Ask yourself whether you really need these items and if yes, set aside a pool every month to ensure you can make this purchase without affecting your overall liquidity or credit standing.

Keep an eye on your credit card limit (if you have one) and ensure you have sufficient balances to clear the bills on time to avoid falling into a debt trap.

Regularly review your portfolio

There is no meaning to investing unless you take efforts to monitor your portfolio on a consistent basis. This gives you the flexibility to course correct, if need be, or to simply increase investments in well-performing assets. Either way, this will help improve the overall quality of your investment portfolio.

Also, it is wise to check your credit portfolio regularly, one can do so by monitoring your credit report. It shall help you to find out any discrepancies in payments and reporting and will enable you to take corrective action in time.

Plan your taxes in a smart way

It is beneficial for you to begin tax planning for the financial year after considering your current financial health, life goals (short-term and long-term), the historical performance of your portfolio, and evaluating the current macroeconomic conditions. It is wise to commence this planning journey sooner rather than later, to avoid rushed decision-making and unwanted tax deductions. For the most tax-efficient investment, you should keep track of all tax exemptions and rebates across your investment instruments.

Getting started on your financial planning journey can be made simple and seamless. While you plan for a financially healthy 2023, here are some imperatives to keep in mind.

Things to Keep in Mind While Planning Finances

Prioritize insurance

There are several aspects to insurance like protection, wealth generation, and a select few which offer the policyholder a combination of both. It is important to have life and health insurance in your financial plan, especially if you need to make ends meet every month for your family. This is an essential element of your financial planning and should be of utmost importance to avoid having a dent in your savings due to unforeseen contingencies.

Put your debt obligations first

You should create a plan that enables you to pay off high-interest debts at the earliest possible time to reduce your debt burden. As a result, you could save more and invest it wisely in wealth-building investment avenues.

Save up for emergencies

Emergency funds are imperative, and the pandemic taught us how they can be lifesaving in a time of crisis. Putting aside these extra funds every month may be challenging. However, this contingency plan will ensure you have enough funds to cover your expenses if you lose your job or face an emergency.

Don’t forget to factor in inflation

It is important to factor in the adverse effects of inflation when making an investment. The capital value of your money lessens over time therefore, your funds must grow faster than inflation if you are to meet your financial objectives. As time passes, financial needs evolve, which essentially calls for in-depth and sound planning. Hence, it’s advisable to create certain cut-offs for expenditures and a minimum monthly saving threshold that can help you tackle inflation.

Retirement planning

It is never too early to start planning for your retirement. Responsible retirement planning gives you the flexibility to invest small amounts in multiple long-term investment options to build a substantial corpus over a 10–15-year period. A sound retirement plan enables you to cement a financially secure tomorrow.

Maintain a healthy credit score to avail of a loan

Many of life’s milestones need significant financial expenditure, which may not be necessarily met with available liquidity. This is when you may choose to opt for credit from reputed financial institutions. Availing credit to purchase your first car or home is commonplace and a healthy credit score is an essential prerequisite to meeting this need.

A healthy credit score reflects good credit behavior and instills confidence in the lender about your repayment capacity. It also allows you to negotiate with the lender to avail of credit at better terms.

Bottom Line

You can put a simple checklist in place to keep track of all these activities. Set a monthly reminder on your phone for regular payments and stick to your payment schedule to ensure that you are on track with your financial plan. Alternatively, you can make use of a personal financial management tool with all these functions built in. The beginning of the new year is a perfect time to reflect on the areas of improvement and get a head start on building strong financial health.

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