What Is Financial Planning and Aspects?
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| What Is Financial Planning and Aspects?: Investment Fundas |
Financial planning is a vast roof that includes numerous topics, like
Budgeting
Expenses
Credit and debt
Retirement planning
Insurance planning
To achieve a solid financial foundation, you need to know how each of the above-mentioned topics works together and impacts each other. In this article, we have shared the essential aspects related to financial planning.
1. Make your budget.
Budgeting is a very important aspect that comes first at the core level of personal finance. Making a budget plan will help you know how to spend the money you earn. A specific written budget always helps you make the right decisions about where you will spend your earnings. When you carefully think about budget decisions, you get better control over how you disburse the money you earn.
A major challenge you can face is that a detailed written budget comes with too many financial choices, like you have to keep a record of every spending you have done or are going to do. Debt and overspending are the results of inadequate knowledge and understanding. Future financial planning is going to be arduous.
A budget always creates a clear picture of the amount of money you have. You are very well aware of where you need to spend your money and the amount, if any, the surplus is there. The moment you get to know the ins and outs of your money flow, you can cut down expenses you don't need.
2. Track your expenses.
Keeping track of your expenses is an important tool for budgeting. It includes keeping a close eye on non-essential spending like traveling, clothing, dining out, entertainment, etc. Spending too much on non-essential things makes you not save anything each month. Saving matters, specifically when building an emergency or unexpected fund.
An emergency fund or savings is like cash in hand. You can rely on the times you need to fulfill an emergency. Emergency funds can save you from going into the trap of debt. If you are not keeping proper track of spending, you slip your hard-earned money into all non-essential things.
3. Credit and debt
Taking on debt by using a credit card or financial freedom is not considered a bad thing or habit. However, two kinds of debts are there: good and bad debt.
A simple example is borrowing money from a bank to buy a home. It might be a huge amount of debt you need to pay, but if the bank offers lower interest rates, buying a house is like an asset, as the house's value may increase gradually. In the same way, if a student goes for study loans to finance a college degree, it will increase earning potential at lower interest rates. It is considered a good debt.
On the contrary, if you are going shopping in a mall and purchasing goods using a credit card, you need to pay 24% annually to the credit card as interest. Moreover, it offers you to pay in EMI rather than in full, which is bad debt. And if you do not pay the balance on your card, it adds more interest you have to pay, so it's like a trap.
Financial independence makes you able to get out of the trap of debt. When you find yourself in huge debt, the first step you can follow is to make more than the minimum amount paid. If
You only make the minimum amount due every month. Let me tell you, it takes so many years or even decades to repay your debt, as you need to pay a huge chunk of money as interest. Try to lower your interest rate by paying more than the minimum amount due. By transferring your credit card loan to a card with a lower Annual Percentage Rate (APR), you can do that or refinance other loans at a low-interest rate. In the long run, a higher rate of interest on the debt will be like a struggle.
4 Must Save for Retirement:
These days, making plans and saving money for retirement is essential. The main reason is that only a few companies are offering complete pension plans. Sadly, most people think for retirement planning, they need a handsome amount; they cannot save each month. Instead of an afterthought, saving for retirement should be your utmost priority. A pension plan can take care of your post-retirement expenses.
Planning for retirement is not only a path to your future security but can also avail tax benefits. In the United States, the Internal Revenue Service (the revenue service of the United States Federal Government) has offered special tax advantage accounts such as:
Individual retirement accounts
Self-employed retirement accounts
401(k) Plans for Employees
Roth IRAs to make retirement plans more attractive.
In India, the central government is offering NPS (National Pension Scheme), where you can avail yourself of a regular pension after your retirement. NPS offers tax benefits under section 80(C). It doesn't matter that you are a college pass-out and thinking that you will plan a retirement plan after 30 or 40 years, but my dear, there is always time for a retirement plan and to get maximum savings at your retirement. For retirement, a minimum of 10%-15% savings should be there from your earnings. It still needs to be possible; there is another way to take a retirement plan from your employer.
5. Plan your insurance.
You are following your budget plan, and you have cut down your non-essential expenses, are free from credit card debt, and are now saving for a retirement plan. Is there? You will think, I am all set now. Nothing to worry about, and your future is secure. But one more aspect related to your finances is important and needs to be considered, and my friends, it's insurance.
Insurance is important as you work hard to achieve safety and security for yourself and your family, so protect it. No one is assured about disasters and accidents, which can happen anytime, and if you do not have appropriate insurance, your financial planning will be ruined in a minute.
Some policies are essential for everyone, and one must have this kind of insurance coverage. Along with these insurance plans, many different types of insurance plans are available in the market that are not needed, but you are wasting your precious money that can be invested for some good purpose. There is a thin line between needed insurance policies and more than needed.
To find the insurance gaps, you are the only one who knows about your financial situation. For example, have you done life insurance? It is something you need. And if you have, then it has proper coverage? Take care of your car insurance, health insurance, and disability insurance too. Wherever required, adjust and protect yourself against every possible situation.
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