Personal Financial Planning Guide: 10 Point Checklist for Beginners

Understanding personal finance is all the rage right now, and understandably so! With scorching high inflation rates in the post-Covid world, people of all ages need to be mindful of their personal finances. In India, even half a century ago, fixed deposits and government investment schemes gave inflation beating returns quite easily. But nowadays, those quite literally aren’t enough.

The highest fixed deposit interest rates offer by banks in our country range between 5-6%, while Indian average inflation rate per annum ranges from 7-7.5%. That means, your hard earned money kept in fixed deposits are essentially losing 1-1.5% of value every year, which by the time you retire would have become at least one third of what it was in the beginning, despite accruing interest.

And India is a developing economy. That means, the government will need to spend enormous amounts of money to develop the country in terms of connectivity, infrastructure and several other things. To achieve those, the government has to issue cash to bankroll the expenses and thus that would automatically lead to devaluation of the currency and resulting in inflation.

Japan, for example is a country where inflation rates have been stagnant for several years. This is due to the fact that they are almost completely developed in terms of national infrastructure, thus don’t require too much money for those kinds of expenses. Thanks to that, their government doesn’t need to issue fresh cash to keep the engine running. Thus Japan is also known for adopting negative interest rates in 2016 in an effort to combat decades of deflation by encouraging borrowing and spending.

So with that in mind, it becomes all the more important for the younger generation joining the workforce today to become aware of their expenses and personal finances. Here’s a 10-point checklist for everybody, young and old to consider if they want to have a healthy financial situation by the time they retire.

1. REGULATE YOUR EXPENSES

This is the name of the game. Early on, the more one is able to save from their earnings, be it a job or a business – the more they will be able to invest in asset that consistently give inflation beating returns over a 10, 20 or even 30 year period. That’s where the magic of compounding steps in.

But before we get to investing and compounding, saving as much as possible from your earnings by regulating your income becomes the top priority. This can be done reasonably easily if you are mindful of your expenses. All your expenses should be done in a planned manner so as to ensure that you don’t waste the money on things you don’t require.

To achieve that, you can make a budget of sorts, where you can categorise your expenses under different tabs, sorted according to their importance. These could include EMIs, investments, savings and miscellaneous expenses. This will give you a clear idea where you are spending the most amount of money from your income. That way, you can cut down on stuff that are lower on your priority list while allocating more into savings and investments.

Additional Read: Crypto Investing Guide

2. MAINTAIN A BALANCE SHEET

Balance sheets? Aren’t those super complicated things that companies and banks need to maintain to sort out their books?

Well, yes and yes. And you require it too. Here’s wh

y. A balance sheet is essentially a table that divides your net worth into assets and liabilities. Assets would be investments into cryptos, stocks, gold and the likes, while liabilities are EMIs on the latest smartphone or the brand new bike. It would also include all the loans due in your name while maintaining your assets such as property, cash balance in the bank and all those. You get the idea?

This will essentially help you prioritise in increasing your assets while at the same time decreasing your liabilities over time as your net worth increases. Increasing assets as much as possible while keeping liabilities to the bare minimum is the sure shot way to ensure financial self-sufficiency in the future.

3. MONEY MANAGEMENT

Well, this one is quite self-explanatory. After you have decided a budget for yourself, after a point you will need to rework on the budget too, see where you’re spending more and where you’re spending less. Which aspect of your life can do with a little bit less of a spending and which aspect could do well with some more capital allocation. For example, your Friday night outings could still be fun on alternate weeks while at the same time, reallocating those saved funds to assets that will appreciate over time.

Along with that, money management also involved creating a fund for emergencies, something liquid that you can withdraw immediately for any requirement. This is primarily required for health concerns, and despite the fact that you may have health insurance to cover for your meds, some amount of cash is required to float the boat until the insurance money comes in. Health crisis can happen anytime and hence such a fund is extremely crucial.

4. DESIGN A PERSONAL INVESTMENT PORTFOLIO

Now this can be done by yourself, as an investor or taking the help of an investment expert to guide you in your initial days. The objective at the end of the day is to build a corpus that over time builds long-term wealth for you. And that can only be done through a well planned investment portfolio with objectives lined out.

For example, if you want to invest money to buy a home ten years down the line, that would require a different kind of portfolio – something that is regular with returns and relatively safer. If you want to save some money for your kid’s education, that is another portfolio. If you want to make an investment bucket that you think will multiply your money by an order of magnitude, but also is risky, keep it totally separate from your other investment buckets because you can afford to lose that corpus.

Different life plans and goals require different kinds of investment portfolios with different kinds of risk appetites. So it helps to get some advice from an investment expert to get your started on your journey. Some other popular investment options include vehicles like mutual funds and ETF, or even SIPs.

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5. JUDICIOUS USE OF EXTRA CASH

Now that you’re fiscally aware and have started keeping aside some money for emergencies and savings for the future. But the final aspect of such a move is judicious use of the extra cash you got lying around. After a while, that could become a sizable amount and could be tempted to buy something that catches the eye or go on an international trip. But you shouldn’t do that!

Okay, I don’t mean you shouldn’t buy that thing you really really want, or not go on international trips. Those are pleasures that are very important in life and one needs those. However, the catch is that you must plan and save funds over a period of time for that dream international trip you want to go on, or that expensive watch that you want to buy. The extra cash that you saved needs to be channelised so that you can meet both long-term and short-term goals. You can also divide this extra cash into various investment tools which then can help you build your portfolio even better. 

6. READ AT LEAST ONE FINANCIAL BOOK A YEAR

We’ve always been told that the habit of reading is the best habit a person can inculcate and that is true when it comes to financial literacy. Up-skilling and knowledge can always come in handy when it comes to your finances. The more you read about finance the more your brain gets wired for improvement in your personal finance journey. 

You might see your friends purchasing luxurious items, while you’re busy saving for the long term and be tempted to buy those too. But the knowledge you gain from reading these books will help you stay on track, identifying things that will actually add value to your life and things that won’t. We all deserve to live a life of luxury but not at the cost of incurring more debts and loans. Some of the top finance books include Rich Dad Poor Dad, Think & Grow Rich, and The Intelligent Investor. Taking courses by relevant experts in different financials fields is another way to consume that kind of content in a more compact way too.

Remember, the best investment you can do with your money is by bettering yourself.

7. INSURANCE ISN’T OVERRATED

This is one of the other aspects of money that attract a lot of attention, but not of the right kind. One thing is for sure, insurances are extremely important. Be it insurance for you health, car, or some life and term insurance plans – it all helps. However, the problem around it is that the insurance business is highly commercialised and hence you need to know which insurance you are opting for and what benefits it will provide in case something happens to you.

Hence, insurance premium payments are necessary costs that you will need to bear to ensure the well being of your near and dear ones in case something happens to you. If you happen to meet with an accident, if you were to pay the hospital charges out of your pocket, you could set yourself back by even a decade depending on the kind of treatments you require. On the other hand, if you had an insurance, a significant sum would be covered under the insurance and your financial goals would still be intact. That is the importance of insurances.

8. KEEP HANDY THE INVESTMENT RULES

After you have sorted out your main expenses that you cannot avoid – investment is the next big thing you need to be mindful of. All of us know that we should invest, but what we do not know is how we should go about doing it. As mentioned earlier, taking the help of a financial or investment expert at the beginning of your journey is highly advisable because these people will be able to guide you in the right direction. They have worked with many other individuals and are aware of the common issues and goals people have and how to achieve them.

However, as an investor yourself, here are a few points you can keep in your mind

• Never invest more than what you can afford to lose in risky investment opportunities
• Try to invest in assets that will appreciate in the future, and not those which depreciate over time. For example, a car is the best example of a depreciating asset – it is very useful but depreciates over time hence spending the least amount on it is advisable
• You can consider using the 50-30-20 rule – 50% of your income dedicated to necessary expenditures, 30% to spend on your desires and 20% in savings or investments. This way you will have a pleasurable life and also be able to save funds for the future
• Have reasonable return expectations from investments – don’t expect something to double your money in a month. When something looks too good to be true, in the investment world, it generally isn’t. There are a lot of scams out there and people should stay wary of those.

9. KEEP A RETIREMENT PLAN HANDY

One of the most crucial parts of your personal finance goal is to start planning for your retirement from the very first day. Retirement can seem a lifetime away, but you need to start planning for it from today to ensure that you have a large enough corpus at your disposal to cover for your expenses without having to think about it.

Why? Because with Indian inflation rates averaging between 7-7.5%,  what seems like a very large sum of money would mean significantly less by the time you reach retirement age. Healthcare expenses are skyrocketing everywhere and basic necessities are becoming expensive too. You will need to take that into account when you start your investment journey. A retirement calculator helps in this situation – helping you plot out the exact amount you need to save every month till your retirement age at a certain ROI to ensure that you have a reasonably large corpus that will sustain you even if you’re not earning any direct income post retirement.

10. REWARD YOURSELF

This is the final point of the checklist and probably one of the most important. Why? All the money and wealth in the world means nothing if you aren’t able to enjoy it yourself. So you will need to take a pause from time to time, see how far you’ve come in your journey, how far you’ve got to go and reward yourself for sticking to the plan.

You need to be enjoy life, not just live it. Money and wealth are only useful if you’ve got a life apart from it too. You will have someone you care about to spend it on, it maybe your spouse or children, and even your parents! A vacation from time to time, or maybe buying that one thing you’ve always wanted to buy.

The only thing to ensure is that this shouldn’t become a habit, rather should remain as an objective to achieve from time to time so that you feel successful and want to continue your dedication towards fiscal discipline.

Additional Read: Top Cryptos under $1

CONCLUSION

So this is the 10-point checklist of personal finance lessons that will help you build long-term wealth over time. Mind you, this isn’t financial advice and only serves to educate you on how you can consider planning your financial goals. Any kind of investment requires thorough research and analysis before actually putting your money in it.

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