Having a sound financial plan is extremely important. This will ensure that you are making informed financial decisions. Also, a sound financial plan will make you financially disciplined, which is very important in modern-day life. The following are the 7 steps to create a sound financial plan for the year:
1) Ensure to Follow the 50:30:20 Rule
Whenever you prepare a budget plan, you need to ensure that you stick to the thumb rule of 50:30:20. That is, 50% of your income must be spent on needs, 30% on wants and the rest 20% must be saved or invested in suitable options. Needs are those without which you cannot lead your regular life; these are rent/EMI, groceries and other necessary things. Wants are those that are not absolutely necessary, and these are movie tickets, gym membership, vacation, and so on. The remaining 20% of your income must be saved to build an emergency corpus. Once you have created an emergency corpus, you can start making investments as per your risk profile.
2) Cut Down on Unnecessary Expenses
A rupee saved is a rupee earned. Money once spent is spent forever, you will never get it back. What is the point of incurring expenses on unnecessary things? You must review your monthly expenses and see if you can cut down on anything. If you feel there is something that is burning a hole in your pocket unnecessarily, then you must plug it right away.
3) Set Financial Goals
It is important to have financial goals in life. This will help you in making financial arrangement for the next phase of your life. Financial goals can be short term or long term. Short-term goals can be making a downpayment for a mortgage or purchasing a vehicle. Long-term goals can be retirement planning and children’s education. Once you have set financial goals, you will get the motivation to work towards it. Also, having a financial goal will help you cut down on unnecessary expenses.
4) Plan Your Taxes in Advance
It is important for earning individuals to be tax compliant. It is always advisable to plan your taxes well in advance rather than waiting until the last minute. This is because you are never sure of what is going to happen in the nick of time. Hence, to be on the safer side, you should do away with your tax-saving investments in the first half of the financial year itself. Now that the government has announced a new tax regime, you need to calculate your taxes under both old and new regimes before deciding to follow any. It would be best if you considered making use of the available tax deductions and exemptions under both the systems as this will reduce your taxes significantly.
5) Have Insurance in Place, Always
The modern world is such that it can spring a surprise any moment. If there is an unfortunate incident that needs you to spend a considerable sum for healthcare, then you will be caught off guard. It is for this reason that individuals are always advised to have a health insurance plan at all times. It is not sufficient if only you are covered, you must ensure to include all your dependent family members as well under a health insurance plan. This will give you peace of mind as you will not be needed to bear the medical expenses from your pocket.
6) Keep Track of Your Credit
If you have availed credit in any form from any of the recognised financial institutions, then you must keep track of your repayment. It is imperative to ensure that you are making timely payments as any delay or miss will having telling effects on your credit score. This will hamper your future credit applications. Also, you should regularly check your credit score and dispute if you find any discrepancies.
7) Review Your Financial Plan
If you see there is any additional income or loss of income in future, then you must immediately review your financial plan and make the changes accordingly. If you find an opportunity to save more, then you should definitely go for it. Also, you should review your investments regularly, and you can seek help from a financial advisor if needed.
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Engineer by qualification, financial writer by choice. I am always open to learning new things.