Personal financial planning is the first step towards gaining economic freedom. It is the process of assessing your current financial situation, planning for expenses, and securing your future by investing money in the right places (such as mutual funds, stocks, real estate, etc.). This wealth building exercise is done by working out daily or monthly budgets, banking, tax planning, retirement planning, and more. Since personal finance planning takes place for a considerably long period of time, it is always better to start early – the sooner the better, in order to have a solid financial foundation to lean on in the future.
Here are some personal financial planning tips for those who are looking for some basic guidelines.
- Document & Minimize Expenses
Note down every expense you make, and slowly work towards getting rid of the unnecessary ones. A common rule to use for budgeting is the 50:30:20 rule. First, calculate your after-tax income. 50% of this is allocated to your essential living expenses (such as a house, food, clothes), while 30% of it can be used for your wants (which includes lifestyle purchases). The remaining 20% is allocated for savings.
- Prioritize Your Debts
Make a list of your debts along with the interest rates; include the time limit within which they have to be repaid. Categorize them in the descending order, and start by clearing those with a higher interest rate. Simply making the minimum payments allows interest to accrue, so make higher payments when possible as a strategy for clearing your debts.
- Put Goals to Paper
Psychology says that when you have your goals on paper, it makes them more tangible. Plus, you can make a detailed plan that will help you stay on course for your future financial freedom.
- Plan for Monthly Money Transfers
Use the online automated fund transfer system to move money to savings accounts. This ensures that the money is out of reach, which prevents excess spending. Set up alerts for debt payments; it helps to know when the fund transfer is going to happen (a fixed date every month) to ensure the money is not utilized for any other purpose.
- File Your Taxes
Filing your taxes is a good way to manage your personal finances. Keeping the tax information ready, before the start of the tax payment season is a good habit to inculcate. It includes documenting all records of money transfer, in and out of your account.
- Invest in Retirement Funds
Remember to invest in retirement accounts such as (IRAs) and 401(k), which are employer-sponsored, and help save money in a tax-deferred manner. Even if the company you are employed is in shaky grounds, the money invested in retirement funds can be transferred to an IRA account, instead of withdrawing it and paying a 10% penalty.
- Check Your Credit Report
Be wary of your credit report, when planning for your personal finances. It documents the past use of credit, which is referred to by lenders when approving a loan or credit card. You can get a better loan term if your credit scores are good.
- Leverage Software Tools
Although a long and exhaustive process, personal financial planning is something that should not be skipped. With a proper plan, you can follow clear financial planning to achieve your dream of financial freedom in due course.
Financial planning is essential on both the personal and business front. If you are a small to medium business, and looking to streamline your accounting and bookkeeping processes, SmartFin can help you. With over ten years of expertise in end-to-end accounting services for clients worldwide, we can handle your accounting while you focus on your core business. If you’d like to explore our services, please drop us a line.