Financial planning is a broad concept that involves many elements like budgeting, insurance, business funding, retirement, and getting out of debt. With an abundance of professional financial management advice and tips, beginners to financial planning may feel a little overwhelmed.
However, you don’t need to be a pro or a financial planning expert to get this thing right.
We’ve created this all-inclusive beginner’s guide to help newcomers start their journey toward an effective handling and managing your personal finances.
The purpose of this post is to help readers gain a deeper understanding of how these financial management strategies work together to lay a solid foundation for you and your loved ones.
Financial Planning Tips for Beginners 2020
So, without wasting a moment, let’s explore this list of 15 proven financial planning tips for beginners that will help you enjoy long-term business growth and financial freedom.
1. Set Your Goals Right
Everyone has different priorities and financial goals. For some of us, saving money for our future is a big deal, while for others, wealth is just an illusion.
We would suggest starting by understanding your goals and objectives. This involves both ongoing income and savings.
If you have just started out, you must look for ways to acquire financing so that you can invest more and more in your business operations. Once you’ve successfully streamlined monthly income, you can start saving, say, 20% of your revenues for your future.
2. Regulate Your Expenses Smartly
If your living entirely depends on your monthly paychecks and you find yourself struggling for finances even before the month ends, then chances are you’re spending more than your income.
To control unnecessary expenditures, you need to create a foolproof budget. Budgeting enables you to control your cash flow. Also, it shows how much money you have coming in and how those funds are used.
To create a budget, simply categorize your fixed and variable expenses. Also, highlight your needs and luxuries, things that are important, and stuff you can avoid. The more you convert things from abstract to physical, the better you can control them.
3. Use Personal Finance Software
Personal finance tools and online budgeting software have come a long way. Unlike in the past, when these tools were mainly confined to checkbook balancing and basic budgeting, these resources offer a plethora of benefits today.
You can use your personal finance software to sync all of your accounts and credit cards in one place. Apart from that, you can create budgets, set saving targets, and track your expenses using these online tools and resources.
4. Look for Ways to Increase Your Income
The most important financial tip for any beginner is to learn the value of your finances. It takes a great deal of effort, time, and resources to earn money. This is why it’s important that you know how to respect the money you’ve earned.
There is no denying the fact that you must curtail your expenditures to increase your savings. But this isn’t the long-term solution. You must also find ways to boost your income.
Remember, that concept of the time value of money that you’ve learned in your 10th standard? That’s something you need to do to keep your money moving. For instance, if you’ve saved, say, $5k in a single year. Do not keep that money to stay idle. You can invest those funds somewhere or even in your own business as reinvestment to increase your earnings.
5. Use Multiple Accounts
Did you know keeping a single bank account can make budgeting tough? Ideally, you should maintain up to five different accounts for different categories.
As mentioned earlier, you can leverage online budgeting and accounting tools to keep track of different accounts. This way, it will be much easier to assess the total amount of money you have in hand in each account.
6. Create Your Personal Investment Portfolio
A well-created investment portfolio is key to financial planning. Your investment portfolio covers different financial and investment aspects, including cash, liabilities, and capital.
While it’s a good idea to put more capital into your business, putting all your finances into equity is definitely not a smart move.
Your investment portfolio must reflect diversification. Instead of making short-term investments, try to widen your investment horizon so that you can save more for your future.
After creating an investment portfolio, the next step would be to adjust and rebalance it from time to time (every 6 to 8 months) to minimize your investment risk.
7. Getting Out of Debt
Did you know even a modest credit card balance can cost you thousands of dollars if you pay only the minimum amount every month?
Effective financial management isn’t as easy as it may sound. Many times you still found yourself with outstanding debt even after creating a feasible budget.
While borrowing additional financing to expand your business or to buy new equipment isn’t a bad thing, but you could be in trouble if you fail to repay your loans within the stated time period.
Getting out of debt becomes even more challenging when you have to pay high-interest rates every month on your loans and credit bills. One of the ways you can minimize risk is by paying more than the due amount each month.
Also, there are a few tried-and-tested methods, such as the Snowball method or credit card balance transfer, that can help you get rid of your liabilities quicker.
8. Transfer Monthly Deposits into Investment Account
We know budgeting isn’t everybody’s cup of tea. So, many times it’s just better to keep things simple. Make sure you deposit a certain percentage of your monthly paycheck to an investment account instead of a savings account. This way, you’ll self-restrict yourself from drawing money again and again on unnecessary things from your savings account.
9. Planning for Retirement
After the COVID crisis, many companies have made changes to their pension and old age benefit plans.
In this situation, it is more important than ever to think about money-saving strategies that can help you save some finances for your retirement.
If you think that you can’t save money each month to support your retirement, you really have to reconsider this approach. If you don’t start saving today for your tomorrow, you’ll miss out on the benefits of compound interest.
Luckily, the Internal Revenue Service has introduced several tax-advantaged retirement plans, such as IRAs and employer 401(k) plans that you can include in your budget to save money for your retirement.
10. Get Your Risks Covered
No matter how well you’re doing in your business, your life and your assets are always at stake. These financial risks, small or big, can lead to a colossal loss and put you and your family in a financial crisis.
Sadly, most of us keep our entire focus towards wealth accumulation without realizing that we need to get our risks covered if we really want to preserve our wealth in the long run.
Buying insurance is one of the ways you can significantly reduce the risk of losing money. Here it is important to understand that investing in a ULIP can cost you more than investing in term insurance.
Term insurance plans offer better risk coverage at affordable rates. Also, don’t forget to invest in life, health, and accident insurance for extra protection.
11. Create an Emergency Fund
Create an emergency fund and save some money each month in that account to successfully handle any unforeseen situation.
12. Plan Your Taxes
Tax planning is another critical element of the financial planning process. It revolves around assessing your finances from a tax efficiency perspective.
What tax planning does is it helps you leverage various tax exemptions so as to lower your tax payables at the end of the fiscal year.
Just ensure you stick to legal tax planning practices and do not get involved in tax evasion.
13. Check Your Credit Score
Once you’ve implemented a few basic financial management strategies, it’s time to measure your performance. You can do this by checking your credit score.
knowing where your business and personal credits score lies will give you a better understanding of the source from where you can get loans.
Unfortunately, there’s nothing much you can do to improve your credit score. Just ensure you make timely payments for your loan installments, and your credit score will automatically start to improve.
14. Organize Your Financial Records
As you start doing financial planning for yourself, work very consciously on the process of data collection.
Document your income, expenditures, and assets before creating the financial plan. Also, organize your financial records, including insurance policies, bank statements, property documents, etc.
15. Cutting Expenses
Once you’ve created a budget, and you know about the details of your expenditure, it’s time to get rid of unnecessary expenses and luxuries.
This could be as simple as reducing your weekly restaurant trips to making some major shifts, such as unsubscribing from your timeshare or other memberships that you do not use on a regular basis.
Reducing expenses can go a long way. It can help you save some money on your monthly budget that you can use later on for other important things. Also, if you have acquired a loan, some extra money in the account will help you pay your debt faster.
Last but not least, it will also help you save money for your retirement plans or may also add to your emergency fund if you have any.
The best time to create a financial plan and to save some money is NOW. As soon as you start planning for your future, it will be easier for you to achieve your future objectives.