Step by step guide to do financial planning in 2020
Year 2020 is marked by Corona virus, loss of lives, Lock Downs and Job Losses. Most people suffered because of salary cuts, loss of business and increased medical expenses. Also many people struggled to pay their bills and schools fees. This forced me to think so that everybody should have a solid financial plan in place for themselves, because No one cares about your financial well-being more than you. Having a solid financial plan will allow you to save money, afford the things you really want, and achieve long-term goals like saving for marriage and retirement and above all, face any emergency situation with confidence. Keep reading How to do financial planning in 2020.
Everyone’s financial plan can be different but it has to follow some basic common rules. So if you’re wondering how to create a financial plan, or why you should do so, you’re in the right place. We all want to be financially independent and build wealth. Deciding to embark on the journey toward financial independence is a big deal! It marks a fresh beginning with your money and it means that you’re setting out to accomplish something that can change your life for the better.
In this post, (Step by step guide to do financial planning in 2020) I’ll guide you through everything you need to know in order to plan for your financial future. Keep reading, and then get ready to take some action to kick-start your own financial plan.
The ultimate goal for the financial plan is to improve your net worth
What is Net worth? Your Net worth is Sum of everything that you own that’s considered an asset (i.e., cash, investments, your home) minus everything you have as a debt (i.e., bank loans, credit card debt, money taken from friends and relatives ).
The reason I love net worth is that it’s easy to compare apples to apples. I don’t recommend comparing yourself to other people but rather compare to your-self. This way you can see how your net worth is trending.
For example, let’s assume you have no other assets or debts besides your home. If you own a home that’s worth Rs. 50 Lakhs and you have a home loan of Rs. Rs. 30 Lakhs, your net worth, in this case, would be Rs. 20 Lakhs (50 – 30). As you pay down your home loan, your net worth grows (assuming your home value stays the same or increases).
It’s okay if you have a negative net worth now. The point here is to write down where does your net worth stands today, and track it on a regular basis. If you follow the 8 steps mentioned below, you will be able to achieve all your goal and heads towards financial freedom.
Step 1: Write down your total take-home monthly income
This is the easy part! Jot down what is your take home income (take home means income left after paying taxes)
Step 2: Write down your essential expenses
Start with fixed expenses like rent, loan payments and insurance, then factor in other monthly costs that are always the same. These are your essential fixed expenses.
Step 3: List your essential variable expenses
You know you’ll have these bills, but the amounts vary. Examples are your phones, utilities, food, household expenses, patrol, medication, public transportation, shoes and clothing. You can assign an estimated amount to each based on past experience.
Step 4: List reasonable amounts for nonessential expenses
This includes entertainment, eating out, hobbies and other ways you spend money on a regular basis.
Step 5: Find the other miscellaneous exprenses
Items like car maintenance, repairs, gifts, vacations, parties and holidays may come under category
Step 6: Figure out your totals
Add up your expenses, (for items that do not recur monthly, determine the annual cost, then divide by 12 to see how much you should set aside each month to anticipate that expense). Then subtract that amount from your income. With luck you’ll come out in the green (ideally your expenses should not be more than 70 % of your income). But even if your expenses exceed your income and you see a negative sum. Don’t panic—this is just the start of an ongoing process.
Step 7: See where you can reduce your expenses
If you came up short, go back to your projected monthly expenses and see what you can get rid of. Look first to your nonessential expenses. Which items can you remove altogether for a while (eating out seems like a fine target; perhaps hobby expenses too, for a season)? Or can you reduce your rent by shifting to a cheaper option. Keep going through the list, making adjustments until your total expenses are less than your income
Also read How to search for best Rental Home
Step 8: keep a record of your expenses
Keep a daily record of the actual expenses. For this you can use mobile apps, Excel sheets on your PC or you can simply write it down on a paper. This will help you indentifying, exactly where you are exceeding your budget and you can take action to correct it. You can write me in the comment box if you want a template for the same.
Most experts suggest that you should have a 50-30-20 Plan (which means you should spend 50% of your income on Essential expense 30% on lifestyle and leisure (Travel, buying new furniture or car etc…) and 20% should go towards investment. But I would recommend you save at least 30 % for Investment, because your Investment would help you in improving your Net Worth.
In the next Article we will discuss more about Goal setting, Retirement, Insurance, Tax Planning and Investments.
“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” – Robert Kiyosaki..
The sooner you get started, the sooner you’ll be on your way to reaching financial freedom.