Whether you have just graduated out of college or are a highly experienced professional, there is no denying that it is important to manage your personal finances prudently. Your spending and saving habits have a long-term impact on your financial wellbeing. Therefore, apart from basic financial literacy it is important to understand key concepts of financial planning as well.

There are numerous benefits of having a financial plan in place. Some of the key reasons why you need a financial plan are covered in this article - 10 Reasons Why You Need A Financial Plan.

Though everyone wants to streamline their personal finances and invest wisely towards their financial goals, very few actually chalk out a financial plan. But, the truth remains that unless you work out a plan, it can be tough to accomplish any financial goal.

Therefore, when you're in charge of your money, it's best to have some understanding of basic financial planning concepts and techniques.

Here are simple every day methods you can immediately implement to keep your personal finances on track:

1. Start with a budget: Budgeting is the process of creating a balanced formula on how to make optimal use of your hard-earned money. Simply put, a budget is an itemised summary of the anticipated income and expenses for a given period, say a month. It will keep your expenses in check and keep you out of debt. It will also help you work your way out of debt, if you are in one. Although there are plenty of free budgeting software and apps available online, you could just start with a pen and paper or an MS-Excel sheet to get a hang of the exercise. Always write down specific expenses.
    
2. Keep a contingency reserve: An essential component of a solid financial plan is its emergency fund (also called a contingency fund). As you know, life is uncertain and emergencies (such as loss of income, medical emergency, loss of assets, etc.) are contingent in nature and therefore, an intelligent approach would be to put away a portion of one's savings to counter these exigencies if/when they arise.
   
   Ideally, review your budget and save a minimum of 6 months of monthly living expenses in a contingency fund – that includes everything from household expenses, to EMI payments, or any other expenses you may incur during a regular month. Those with several financial commitments, and who are averse to risk, as well as those who require high amounts of liquidity can maintain 24 months of monthly expenses. But on an average, 12 months of living expenses can be held as a contingency fund.
    
3. Purchase an adequate life and health insurance plan: This is the most neglected area of personal finance. People seem to understand its importance only when an untoward event happens. If you are the sole bread earner of your family or there are liabilities to be repaid, make sure you purchase an optimum life and health insurance plan.
   
   According to the 'Income Rule' used by insurance advisors, one should have a sum assured of 8 to 10 times of one's annual income. An alternative method is evaluate your Human Life Value, whereby you are optimally insured for life. Pure Term insurance plans are by far the best to indemnify risk to life. And ideally, you should keep your insurance and investment needs separate
   
   From a health insurance perspective, purchase a policy with a minimum cover of Rs 5 lakh and covering all your family members.
    
4. Pay-off high interest debt first: You can minimize the amount of interest paid over time with timely payments of your credit card bills. It is advisable to repay the outstanding dues in full every time your credit card bill arrives and always spend within your means. Always look to avoid taking high interest credit, lest you fall into a debt trap. It is better to save and invest towards luxuries and lifestyle spends than falling for instant gratification of buying items you may not really need on your credit card or by taking a personal loan.
    
5. List down your financial goals: The primary objective of financial planning is to help you achieve your financial goals. Start by listing them down into short term (up to 2 years), medium term (from 2 to 5 years), and long term (above 5 years). Plus, ensure your financial goals are: Specific, Measureable, Adjustable, Realistic and Time Bound (S.M.A.R.T). Once you do so, you should calculate the future value of these goals using an inflation rate. Ideally, a 7% inflation rate would be fair enough to derive the tentative figure. For financial goals maturing in 3 years, make sure to allocate the entire corpus to a debt fund. The equity exposure will go on increasing as the maturity period of the goal increases.
    
6. Start planning for your retirement, NOW: Many fail to understand the need of planning their retirement. However, you need to spend at least 20-25 years of your life without a steady source of income. Post-retirement you need to make the money saved during your working life, to work for you. But for your money to last, you should ensure to have saved up a substantial corpus. The thumb rule is to save at least 10% of your income, towards your retirement.
   
   We believe your retirement is as important a goal as planning for your children's future needs. In a world where we've witnessed the evolution of nuclear families, banking on your children for your retirement needs might be myopic. Hence, it is better to plan and save for your retirement.
    
7. Asset Allocation is the key: Asset allocation is the foundation of financial planning. A right mix of equity and debt will help you achieve your financial goals in the time horizon you planned. As you may have read in earlier articles, a common rule of thumb used to decide the proportion of equity in an asset allocation is 100 minus your age (100 – x years).
   
   The rationale behind this rule is: the older you get, less time you have to recover if the stock market tumbles and your risk appetite recedes as well. As you enter retirement, taking all your money out of equities could slow down the growth of your portfolio too much, preventing you from keeping pace with inflation and possibly deplete your retirement savings.
   
   Although this isn't the optimal approach to structure one's asset allocation, it could be a good starting point for beginners in the investment arena.
    
8. Review your financial plan regularly: An annual review (or bi-annually in some cases) will increase the possibility of fulfilling your financial goals by allowing you to incorporate any personal or economic changes in your financial plan. A review also includes analysing the investments you've done to achieve the envisioned financial goals and determine if they are on track to accomplish the financial goals. For example, if you have invested in equities, then it would be prudent to check the current standing and potential of stocks and equity mutual funds in your portfolio from time to time. It could be possible that a stock or equity mutual fund may be underperforming; and in the case of an equity mutual fund scheme, there could be a change in its investment objective or style, which no longer meets your purpose of investment.

PersonalFN has developed a comprehensive program that will help you learn the art of financial planning and manage your personal finances better. The program is completely online and focuses on self-paced learning. Every chapter is followed with a quiz to assess your understanding.

Sign up for PersonalFN's comprehensive A to Z e-course to Become Your Own Financial Planner. With this e-course, you too, can create a financial plan like an expert. It will be your guide to most serious decisions regarding money matters.

The tutorials start with the basics of budgeting and managing cash flows and then moves on to how to set SMART goals. You will also learn how to select winning mutual funds, along with the right asset allocation and its importance. The modules will also outline strategies to build your optimum investment portfolio and much more. You will learn the Ins and Outs of mutual funds and other personal finance topics. Read more about this e-course here.

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bhatiap@rediffmail.com Jul 17, 2019 Pl let me about the course

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