Financial planning is not an easy task especially if you are a beginner. You need some sound advice to manage your finances well. Here are the top ten rules for financial planning for beginners.
1. Manage Your Money
It should not be boring to manage your own money. This is not rocket science and hence you should not have a stable background in the field of finance. All you need to show is some form of commitment. The initial step towards financial management is deciding to save. Saving money is a powerful tool for financial independence. You don’t have to borrow money from friends or swipe your credit card towards emergencies. The use of credit cards is the most expensive form of debt. You may find yourself in a trap of debt when you receive this action several times. You need to buy some assets like the latest Smartphone or car from your accumulated wealth and not loans. Therefore, make sure that you make savings for all your income to start accumulating wealth.
2. Wisely Regulate Your Expenses
You will know that you are living beyond your means when your paycheck cannot take you to the next one. There is a high possibility that you are having a high level of unregulated expenses. Having a budget will help you to regulate your cash flows. You will make sure that you will keep your budget under check. Categorize your expenses and begin by meeting the unavoidable ones first. It will help you to have a complete list of your expenses before you. The biggest secret in expenditure is prioritizing your expenses.
3. Keep a Personal Balance Sheet
A balance sheet will help you to know what you owe and what you own. It is one of the best rules that will take financial planning for beginners to the next level. Put together all your bank statements and other documents that act as proof for your liabilities. Also, list the value of your assets like a home and other investments. The difference between the assets and liabilities will show you your net worth. It is always good to grow your value of assets and reduce the number of liabilities over time.
4. Deal With Surplus Cash Judiciously
The way you deal with your surplus cash is a determinant of your future. You are likely to overspend in the absence of a budget. You can use this money to make yourself financially self-sufficient. Inflation makes everything costlier every year. If your investments don’t grow, you will not curb the inflation gap. You can use it to grow your wealth or even divert the accomplishment of your goals. It is good to start making investments the earliest you can. You can perceive it as a bridge between where you want to be and where you are.
5. Create Your Personal Investment Portfolio
It is an achievement to construct your initial investment portfolio. It will be your first step towards accumulating wealth. Building a portfolio entails the distribution of your investment amongst different asset classes such as cash, debt, and equity. We refer to this process as asset allocation. Equity is the best inflation countering and tax efficient vehicle. However, it is not a wise move to put all your money into equity. Diversify the amount that you put in every asset class depending on your investment goals. You can gain more benefits by being a long-term investor. An investment horizon of 10 to 15 years is ideal for most people.
6. Plan for Your Retirement
It is more important to plan for your retirement today than was the case a few years ago. The life expectancy has increased and hence you will longer than the previous generations after your retirement. Some of the vulnerable ailments after retirement are heart attacks, hypertension, and diabetes. The cost of healthcare keeps on increasing every passing year. In case you don’t have a social security net, make sure you have sufficient funds to handle all these issues. Start planning now because it is not too early. You may end up postponing your retirement plans forever. If you don’t want to plan for your retirement, you will want to learn till your old age.
7. Wisely Manage Your Debt
Not practicing debt management can eat up a huge chunk of your paycheck. You may find yourself borrowing fresh loans to pay up new ones which are not a healthy practice. You may get yourself in a vicious debt trap if things get out of control. You may sideline your critical goals in life and even delay your retirement. You can keep yourself from a lot of trouble by strategizing for the payment of debt. If you have several debts, begin with the most expensive ones like credit cards. You don’t want the high-interest rates to eat up all your savings.
8. Cover all Your Risks
You must understand that your property and life is vulnerable to risks. The risks can make you lose income and place your beneficiaries in financial jeopardy. As you invest in essential wealth accumulation, you must make sure that there is an essential preservation of wealth. The challenge with most people is that they don’t understand the elements of insurance and investing. Therefore, make sure that you have an appropriate cover for all your risks if you want to be on the safe side.
9. Plan Your Estate
All of us have some kind of estate and we need to plan for it. It can be the cash in your bank account, your home, or vehicle. You need to know what will happen to these things when you leave the world. Therefore, you have to think about asset planning. Estate planning is not a preserve of the rich. You have to make sure that your assets are in the right hands after you die whatever the amount. Prepare an inventory of all your assets together with a list of the beneficiaries and the proportion of assets you attach to each of them.
10. Tax Planning
Use a tax efficiency point of view to analyze your taxes and plan for them in an optimized way. Make maximum use of the various tax benefits, deductions, and exemptions that will help you to reduce your tax liability each year. However, don’t indulge in tax avoidance and tax evasion as this is illegal. Make sure you meet your obligations as a citizen while planning for your taxes.
These are the best rules of financial planning for beginners. You can be sure that all these tips are useful for your success. You will have maximum control of finances in your hands.