Most of us are easily intimidated by the words financial planning and investments. We tend to think that we need some kind of expert knowledge on finance to manage our money wisely. However, the truth is that the more knowledgeable and experienced you are, the better, but you don’t need to be an expert to manage your money. Following are 5 golden rules of financial planning that you can easily adopt:
- Start early
If you are under the impression that drafting a financial plan is for middle age, you cannot be more wrong. To ensure that your investments fetch you the desired outcome, it’s important to start and save early. If you are wondering when to start, experts advise starting as early as you receive your first paycheck. This is because you give your investments ample time to show the magic of compounding. The power of compounding is directly proportional to the number of years you invest in a scheme.
- Involve your family members
When it comes to financial planning, breadwinners often consider it as their onus to provide for their family, and thus, shy away from discussing the matters with their family. This is not appropriate and must be changed. Financial planning cannot be executed without taking your closed ones, mainly your family members into confidence. You must have their complete support to make savings and investments as planned. Without your family offering you full support, it would be challenging even to move a pebble beneath your feet.
- Consider the good old 50/30/20 rule
This is one of the golden rules of financial planning, which you have probably heard before. Coined by the famous Elizabeth Warren, this rule is a simple budgeting plan which doesn’t dive deep into the details of various spending categories. This rule presumes that 50% of your income is spent on your necessary needssuch as mortgage or rent, utilities, groceries, etc. 30% of your income goes towards your wants such as shopping, vacation, movies, etc. The remaining 20% is reserved for your savings or investment. This basic budgeting plan is a good place to start managing your money.
- Consider risk, security, and liquidity
The biggest benefit of financial planning is the balancing act among various financial needs. You can take a certain amount of risk for higher returns but you cannot put your total investment value into risk. Finally, you should have certain investment components that offer liquidity at times of need while maintaining the value of your investments.
- Never ignore tax
Just like death, taxes are not likely to go away. Does your investment options save tax on your returns besides offering a good return? If it does, then you have the right component in your portfolio. Every financial portfolio must have some tax-saving elements that can soak the entire deductible limit of your taxes while maintaining consistent growth of your investments. You have an array of types of investmentsranging from secure, high growth to highly liquid. While planning your annual taxes always make a mix of these components to ensure a balance in your portfolio.
Finally, remember that financial planning is not a one-time thing. You need to remain alert and keep monitoring your investments timely. Frequent monitoring will aid you to avail specific growth opportunities that are easily overlooked by several investors. Happy investing!