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What is personal finance?

A financial plan is a roadmap or a strategic decision-making process of how one can allocate their funds in a proper manner in order to achieve their short- or long-term goals. It takes into consideration your current financial condition and helps with prioritizing.

The main objective of financial planning is as follows:

–      Creating a budget

–      Assessing your current financial condition

–      Setting your goals

–      Creating a check-list of short- and long-term plans

Here are a few steps on how to create a financial plan:

1)  REVIEWING YOUR CURRENT FINANCIAL POSITION:

In general, it is advised to always review and update your financial plan every year. To start the planning process, one needs to assess their current net value. For example, the type of assets, the expenses/ debts or any kind of instrument that would add or drop the financial value.

Understanding the above points would help an individual check:

–      How much they spend?

–      If these expenditures even necessary?

–      How to reduce these expenditures?

2)  SETTING GOALS:

Having goals is important as it helps prioritize finances better, these can either be short term or long term. Short term financial goals can be like buying a bike, investing in gold and insurance. While long term financial goals could be education, buying a house and more.

The best way to set goals is to think S.M.A.R.T:

–      Specific

–      Measurable

–      Attainable

–      Relevant

–      Time-bound

This method is simple and inculcates financial discipline along with giving a sense of motivation to continuously save funds.

3)  CREATE A PLAN FOR DEBTS:

Debts could range from car loans, mortgages, student loans and more.

A personal loan is the amount of money one can borrow from a bank, credit union or online lender in order to pay for expenses such as medical bills, vacation costs and more. This borrowed amount can be paid back in regular installments over time. A personal loan can be used for various reasons and is a lump sum amount.

To go ahead with a seamless financial plan, it is better to overcome loans faster. This can be done by prioritizing the loan on the basis of the fee payment and the interest rates.

4)  EMERGENCY FUNDS:

An emergency fund is a personal budget that is set aside as a safety net for any sort of future setbacks or unforeseen expenses. This is a critical part of financial planning since it makes one prepared for risks such as being dependent on credit, falling into debt or in case of general unforeseen events such as job loss, extensive repairs and medical emergencies.

Following are the reasons for having an emergency fund:

–      Keeps one afloat in time of need. That is reducing dependency of borrowing funds from others.

–      Acts as a cover fund that helps against unpredictable scenarios that might have immense expenses.

–      Reduces the weight of debt burden and financial anxiety.

5)  ESTATE PLANNING:

This is more related to creating your will, power of attorney, trust information, etc.

Estate planning is determining how an individual’s assets are safeguarded, handled and handed out after death. It also counts any type of financial obligations the individual had before demise.

This is very essential for people who travel a lot on work or live away from their families. Estate planning is more of a protection plan for you and your family.

6)  KEEP INVESTING:

It is highly recommended to start investing at an early age. Investing helps an individual to grow their money over the years with the help of compounding. It can also be used to beat inflation, act as a tax saving scheme or even prove beneficial during retirement.

There are various funds you can invest in such as:

–      Mutual funds

–      Stocks

–      IPO

–      Bonds

–      ETF and more

7)  INSURANCE:

Insurance is a policy that the policyholder receives financial protection against loss, risk or damages. For example, car insurance, fire insurance, health insurance and life insurance. One has to pay a small premium amount for this scheme.

Reasons for getting insurance:

–      It acts as a financial back up at the time of emergency.

–      It makes retirement and the future secure.

–      It encourages savings.

8)  TRACKING:

Don’t forget to keep updating and tracking the set financial goals and plans. Always re-evaluate the plan on a need basis depending on the changing factors that might affect it such as change in income, inflation and change in priorities.

In short, a personalized financial plan will help an individual identify their goals, dictate the cash flow, protect from uncertainties and big expenditures, create savings, increase one’s financial discipline and save on taxes.

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