Financial planning is necessary from the day you get your first salary. Most of us start optimistically, only to fall short of our goals as time passes. Many of us don’t even bother and survive from paycheck to paycheck.
But it would help if you did your financial planning systematically. Here, we show you how to plan your short-term and long-term finances to keep your life goals in view.
The Importance Of Goal Setting:
Whatever we want in life usually boils down to money.
If you’re going to go on a vacation, you need money. If you have to buy a new car or a house, you need money. The holiday, car, or home are your goals.
You need money in the future for these things. Hence, you need to set your goals well in advance.
Planning for paying for a vacation could be considered as a short-term goal. It is a goal for immediate expenses. Of course, these expenses will typically have a future date; it would need some planning.
For instance, you may have to pay for a recurring insurance premium or pay credit card bills for a wedding, or home maintenance work.
If you can set your short-term goals, you will gain the confidence to deal with long-term goals. Here are some useful tips:
Allocate A Budget:
List out all your expenses against your monthly income and have your bank statement and bills at hand. You can also download a free online budgeting program to organize your expenses. You will be amazed to learn how much money slips through your hands every month.
Once you have got all the data together, you will start to see areas where you are overspending. For instance, you may notice that eating out is also eating into your budget. Can you reduce it by getting more organized in the kitchen?
Planning For An Emergency Fund:
Life brings you surprises, both pleasant and not so pleasant, and the unpleasant surprises often involve unexpected expenses. Like for example, you meet with an accident. It doesn’t matter what the emergency will be. Because it is an emergency, you can’t predict it. But you can prepare for it. Hence, you need to put aside a regular amount.
According to estimates, almost 60% of Indians have under ₹5,000.00 as spare cash to meet a contingency. It is a grossly inadequate figure.
The best way of creating a rainy day fund is to open an additional bank account and make deposits at regular intervals. Set a target amount like, say, ₹50,000, or ₹100,000.
Once you have selected this goal, you can add amounts as and when you have extra money. You can generate this amount from various sources like a percentage of your salary or selling household items that you don’t need.
You should aim to build up your emergency fund so that you have the value of your expenses of three to six months. That way, if you are between jobs and not getting an income, you won’t have to dip into your savings. It is this short-term goal that will help you look after your long-term goals.
Pay Off Your Credit Card In Full:
Although the opinions vary on how you should deal with your credit card debt, there is one universal truth about handling this issue: paying 100% of your credit card outstanding amount every month. That way, you will not be burdened down with additional debt.
The trick here is to keep a careful tab on your credit card expenses. Keep the credit card slips every time you swipe at a point of sale (POS) and note down all other payments you make from your credit card. Maintain a budget for your credit cards and try to stick to it.
Once you have crossed the limit set by you, do not use your credit card until the next billing cycle begins. That way, you can be sure of paying your credit card bill every month. These days, there are amazing credit cards for millennials, that have been designed for various endeavors like traveling, shopping, etc.
The added advantage of keeping up-to-date with your credit card payments is that it contributes to a good credit score.
Long-term goals involve planning to finance expenses that will appear several years into the future. A few examples of long-term goals are a retirement fund, saving for a student’s educational costs, and planning to purchase land or a home.
With long-term goals, you plan for expenses so much into the future, and the amounts involved are necessarily massive. Thus, organizing your finances for long-term goals is much more complicated than for short-term goals.
Planning For Long-Term Goals:
The primary activity in planning for long-term goals is saving for retirement. Typically, you should save 10% to 15% of your monthly income toward a retirement plan. However, you still need to review your retirement fund to ensure that you save enough for your expenses when you retire.
You can open a retirement account with a financial services provider. However, it is always a good idea to put it past an independent financial advisor. The advisor will perform complex computations which will project:
- With the current contributions, how much money you will have on retirement, and
- How much you need to contribute today to retire on your own terms, that is, to be able to lead a lifestyle of your choice.
Your financial advisor will also consider additional requirements on retirement like healthcare and assisted living.
The Challenges Of Setting Life Goals:
Setting life goals is not easy. You should always plan to have money in the near or distant future. To achieve your goals, you need to be aware of some of the challenges you might face.
Here are a few regular difficulties you might encounter while attempting to achieve your goals:
Effect Of Inflation:
Inflation can be best described as an increase in the cost of goods and services. We usually express inflation in terms of a percentage that forms an index.
For example, in 2018, you paid ₹100.00 for something, and by 2019 inflation rose by 5%. Thus, in 2019, you would need ₹105.00 to buy the same item.
The Reserve Bank of India (RBI) has fixed the annual inflation rate at 4% (+/-2%). However, in July 2020, inflation rose to 6.93% in India. Although the RBI set retail inflation at 6.09% for June 2020, it was later revised to 6.23%.
You can see that even the government isn’t able to control inflation. Therefore, you have to make provisions for it while setting your financial goals.
By taking the average increase in inflation over several years, it is possible to project the cost of goods and services, say, 20 years into the future. Thus, you need to invest today to have enough to spend many years hence.
By risk in the financial world, we mean the possibility of unforeseen events.
There is a variety of investment options that you can take while investing money. If you leave your money in your bank account, although it’s the safest option with the lowest risk, you will get the least interest. As such, your money will not grow very fast.
Stocks and shares are the highest risk category—it means that your money may not be so safe if you invest it in the share market. However, high-risk investment also indicates that you can get very high returns.
On the other hand, if the stock market crashes, you may not even get all your money back.
It is usually best to invest the bulk of your money in low to medium investments, but again, everyone has different preferences for risk planning.
Life Insurance Planning:
There are no guarantees in life. No one can know what is waiting around the corner.
The income you earn pays the bills, the mortgage on the home in which you live, and provides for future expenses. Take a minute to envision what would happen if you were no longer available to provide for your loved ones. How would they manage?
Whatever you do with your money to set your life goals, being adequately covered with a life insurance policy is vital.
By taking out a policy on your life with your loved ones as beneficiaries, they will receive a payout to replace the lost income if you pass away unexpectedly, provided your premiums are paid up-to-date.
A competent life insurance agent will guide you in getting adequate coverage based on the information you share regarding you, your family, and your income.
Set Your Life Goals Today For A Brighter Tomorrow:
We aren’t perfect, and our planning process is undoubtedly not likely to be so. You may not be satisfied with your progress in the financial planning of your life goals. Bad things happen when you least expect it—you end up facing unwarranted expenses.
If you end up clearing out your emergency fund in the unfortunate event of a car accident, sickness, or job loss, don’t be despondent. Be satisfied that you had that money to fall back on.
If you consistently plan your finances in line with your life goals, it will become a habit. Once you create this mindset, you will be surprised how a little planning today can enable you to reap a rich harvest tomorrow.