FINANCIAL PLANNING BASICS
What does it mean to be financially fit?
To be financially fit doesn’t mean merely having a regular job that pays well. It is not just about having several insurance policies to protect you against unexpected losses due to some fortuitous events. Neither is it limited to just having the means to cope with all of your family’s financial obligations and needs. Being financially fit includes having plans in place for your financial needs in the coming years. It is also about having a plan for your children’s future. But most especially, it is about building a nest egg you can bank on to be able to live comfortably once you retire from work.
Being financially fit is similar in many aspects to trying to be physically fit, where you have to be on the right track and do the right things to achieve your goals. It is not just about merely focusing on a desired outcome or zeroing in on a targeted goal. It is more about charting the correct path and staying on track all the while. It includes having well defined and achievable objectives to fuel your enthusiasm to remain on the path and not be sidetracked.
Financial fitness is not limited to achieving a targeted net worth nor accumulating a specific level of wealth. Rather, it is more about having a state of mind that is focused on setting the most appropriate financial goals, developing the most suitable financial plan, and incessantly working towards achieving them. However, you need to be financial literate to find the right path and start enjoying the benefits of being financially independent.
You have to realize that nothing is truly permanent in this world except change. There is no escaping it. It means even your current financial standing today is not likely to be the same financial position you will find yourself to be in tomorrow. It is going to turn out for the better or for the worse. There is no way you can stop change from taking place. The only thing you can do is to set the direction it should take and keep it that way.
The first step to achieving financial fitness is to undertake prudent financial planning. To do this, you need to have a strong determination, unwavering discipline, plus you have to be prepared to make a great deal of sacrifice. In exchange, the rewards you will reap will simply be remarkable.
Financial planning is all about the right approach and has little to do with financial expertise. Take a look at the step by step guide to master the basics in financial planning. This will not only help you manage your money better but lets you save a part of your earnings so that you can have a worry-free future.
Here are some easy to follow steps:
Step 1: Take an overall view of your finances
This doesn’t merely mean stashing away your money in the bank or investing it either. It’s about keeping a tab on every point through which your money leaves you as well as comes to you. Here are some of the points to be considered:
The above-mentioned aspects are the general costs borne by every earning individual, although it may not be limited to the same.
Constantly monitoring your finances shouldn’t take up too much of your time, provided you do it on a regular basis. If you feel you require assistance, you can go ahead and get it, but make sure it is from a trusted source.
Step 2: Stick to a plan
Ensure you pay your insurance premiums, equated monthly installments regularly.
Make informed decisions when it comes to investing in stocks, shares, gold and so on. Never invest without knowing the risk you are getting signing up for.
Keep away some money for emergency reasons; you could either invest this sum in equity shares where you have the option of withdrawing on demand, or you could also keep a recurring deposit.
The money that is automatically deducted from your monthly salary is towards your provident fund which is meant to help you post retirement. It is vital that you never touch your PF money until you retire because this is a form of forced saving, and it should ideally start the moment you start earning.
By trying to focus on saving, don’t be stringent on spending for essential things in life. The important thing is to categorize what’s essential and what isn’t.
Invest in equity only according to your needs and income; do not invest in high-risk shares expecting higher returns.
Step 3: Remember: Income – expenditure = savings
What this means is your expenses should not be more than your income for you to generate some savings.
Make sure you save at least 15% of your gross annual income, in your bank account. This should be a habit so that you have some money at your disposal as and when you want it.
The most ideal approach is to put part of your savings on autopilot using retirement plans such as your 401k. A clever way to do it is to increase your monthly contributions if you have not exhausted the maximum allowable monthly contributions for your 401K. Simply add an additional $50 to $100 each month to it. This will balloon over time, making a huge difference in your net worth at the time when you need it most.
Consider this. If your age now is 25 years old and you decided to add a hundred dollars each month to your 401k monthly contributions, you will have a whooping three hundred thirty thousand dollars ($330,000) extra money on your 401k account by the time you reach the golden age of 65. This is the conservative estimate on the returns of the add-on contribution based on 8% annual return which is a lot lower than the historical average long term returns of equities.
Don’t forget though, that your add-on contributions are considered as pretax investments which means they will chip off $75 from your monthly paycheck for that $100 monthly add-on investment you put in (that is, if you happen to be in the 25 percent bracket).
The add-on money you put into your 401K account is automatically invested, that is why it is the easiest and most convenient way to save. The money gets invested without you laying your hands on it which means you will never have a chance to change your mind and spend it somewhere else.
Now, if you are lucky to have a very sympathetic and kind employer, he may just decide to put in a matching contribution, which means you’ll end up with more free money in your savings to tidy you up during your golden years. But, if you happen to have already maxed your 401k, your best option is to make an automatic $333 monthly payment to an IRA account. Contact the nearest IRA office for assistance on how to set up automatic monthly payments.
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