When we just begin to earn, we tend to get carried away easily by immediate cravings or luxury items. However, at this stage, financial planning is quite crucial. Irrespective of the stage of earning, we would be having a few long term expenses on our minds such as getting that dream house or dream car or some short term expenses like a vacation! But, how can we achieve this, whilst taking care of the regular monthly bills and basic expenses? Financial planning is the answer to this question. Let us look into the ways we can plan our finances to meet some of the big future expenses.
1. Tracking expenditures
This is a known fact that one needs to begin saving as well as investing at a very early stage. Developing discipline early on is essential for success in the long run. Firstly, you must understand the income earned and the expenses generated every month. This is how you can formulate your budget. When we talk of expenses, expenses like rent, conveyance, utility bills, and groceries can be determined easily. However, the tiny bills, like the ones spent on eating out or at the movies is missed out. These are the expenses that dig a huge hole in your income at the end of the month. It is advised to have an expense tracker or maintain a diary where every single expense is recorded and this ensures you do not spend on unnecessary items.
2. Save for your goals
Apart from smaller expenditures, you will also have some bigger expenses like vacations, buying gadgets, etc. These days people opt for personal loans or get funds via credit cards to achieve these goals. But, what we fail to realize is that excess borrowings could lead to financial disasters. It just pushes you deeper into debt. One of the most expensive forms of borrowings is the personal loan which charges an interest rate of about 20-24% per annum. Another expensive option is the Credit card which becomes a burden if you do not clear your dues on time. It is advised to allocate just 30% or less of your income towards repayments. Also, when you opt for credit cards, make sure the bills are paid within the monthly due date to avoid the high-interest charges. The best way to achieve such goals is to save from your income a specific amount and use it towards the goal.
In case you have some goals in mind, you need to classify them into short-term goals, medium-term goals, or long-term goals, which helps you calculate the exact amount needed for the goals. In case your goal is to be attained about 3-4 years later, for instance, buying a car or going for higher education, then you could opt for an investment in any hybrid fund that gives you capital appreciation.
3. Classifying Goals
As mentioned, goals can be classified into 3 types:
(I) The Short-term goals
These are goals that you intend to achieve in the next 1-3 years, as a Foreign vacation, buying a gadget, or creating an emergency fund.
To achieve these goals, you could invest in a liquid fund, a recurring deposit, or a short-term debt fund. Since you would need the funds in a short time, you could opt for debt instruments. In such a scenario, your aim isn’t about getting high returns, it is to preserve your capital and ensure liquidity.
(II) The Mid-term goals
These are goals that you intend to achieve in the next 4-6 years, as going for Higher education and buying a car or house. To attain these goals, you could invest in hybrid funds, ELSS, corporate bond funds, or fixed deposits. For medium-term goals, you must have a balance between the returns and the risk. By opting for corporate bond funds you would be investing in highly-rated corporate bonds having a maturity of 3-5 years, whereas investing in hybrid funds would give you some equity exposure required for capital appreciation.
(III) The Long-term goals (Over 6 years)
These are goals that you intend to achieve over 6 years. This could be buying a house, saving for a wedding, planning for retirement or wealth creation. You can achieve these goals by investing in Equity funds, ULIPs, NPS, or PPF. In order to tackle inflation as well as to ensure capital appreciation, your portfolio must have the required exposure to equity.
4. Emergency fund Creation
the top priority has to be creating an emergency fund. Today’s generation leads a fast-paced life and shortage of funds is an issue faced when unexpected expenses appear. An emergency fund will help you take care of such unforeseen expenses, for example, sudden vehicle repairs, a medical emergency, damages to a phone, or maybe a job loss as well! An emergency fund prevents you from borrowing. Even in case you wish to pursue your passion, an emergency fund could be quite helpful. Always ensure to have an emergency corpus which is equivalent to your expenses for 3-6 months and this fund size can differ based on your financial situation. You can opt for investment in any liquid fund or even a recurring deposit to create your emergency fund.
6. Buy health Insurance
Always buy insurance – life, and health in your early years itself as you can get it at a cheap premium. The best insurance plan to opt for initially would be that of health, as it would have a low premium. The basic plan would cover charges of hospitalisation and you could also include an accident disability plan to enhance the insurance coverage. Avoid opting for endowment plans.
6. Pay Off debts
Be it your credit card, personal loans, education loans, or any other loan, it is suggested that before you opt for any kind of further borrowing, you must clear off all the debts in hand. Repayment of loans must always be a priority as the component of interest is the burden in any loan. Furthermore, the tax deduction available on interest paid u/s 80E is for the initial eight years only. These steps might appear too simple to give it a thought about, yet they are crucial to ensure you save enough to meet all your goals rather than opt for borrowings. Hope this post gave you an insight into how to plan your finances for your big expenses!
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