Everybody has a different financial condition, therefore it is unrealistic to use a one-size-fits-all approach to financial planning. However, there are certain general guidelines that you can use to measure your advancement while you work toward your financial objectives. Even though adhering to these guidelines won’t ensure success, doing so can help you get started on the path to debt repayment, asset accumulation, or a happy retirement.
Rule #1: Maintain Debt Control
In an ideal world, you would have no consumer debt, but that isn’t always feasible. You can be attempting to manage debt from credit cards, student loans, a vehicle loan, or another source. Most financial planning professionals concur that your total monthly debt payments shouldn’t be more than 36% of your gross monthly income when determining how much debt is too much.
This is a good place to start, and if you can lower that amount over time, you’ll be in decent shape. For instance, consolidating or refinancing your student loans may result in a lower interest rate and more of your monthly payment going to the principal. To merge your credit card balances and reduce interest payments, you could also take advantage of a 0% balance transfer offer.
Rule #2: Prevent Living in Poverty
Another crucial financial planning guideline is to choose how much to spend on a home. Start by determining your debt-to-income ratio using the 36% benchmark for the total of your monthly loan payments. Then, take into account how much you could pay each month for your mortgage without going over the 36% limit. Typically, this is the maximum price you may pay for a house.
Another general guideline for housing is that you shouldn’t spend more on a home than two to three times your annual salary. You shouldn’t spend more than $250,000–$300,000 for a property, for instance, if you and your spouse make $100,000 annually. Although this is only a preliminary estimate, it might help you determine how much you can pay for a mortgage in order to prevent being without a place to live.
Rule #3: Try to Save 10% or More of Your Income
One of the most common saving guidelines is to set aside at least 10% of your salary. Keep in mind that this usually assumes that you are also contributing additional funds to a retirement plan. You should follow the 10% rule when setting up a savings account to cover unforeseen costs, a college education, and other objectives.
If your employer has a matching program, you need to save at least enough to take advantage of it when it comes to how much you should save for retirement. It comes at no cost. These matching schemes may cost you 3-6% of your gross income, but you shouldn’t stop there when saving for retirement. The minimum savings goal for younger people with more time to save is 10%, yet as you get closer to retirement, you might aim for 20–30% depending on your present nest fund.
Rule #4: Be Sure to Have Emergency Funds Available
When there is a sudden loss of income or another financial disaster, an emergency reserve is utilized to pay bills. The majority of specialists advise that a household have three to six months’ worth of costs on hand in case of emergency. Therefore, you should aim to maintain between $7,500 and $15,000 in your emergency fund if your monthly obligations total $2,500.
However, depending on your financial condition, you might choose to save more or less. For instance, if you work for yourself, you could wish to expand your emergency reserves to nine or twelve months’ worth of costs. On the other hand, a $1,000 initial emergency fund can be adequate if you’re single, generate a respectable income, and have no debt. Through automatic deposits, you can keep growing your savings account over time.
Rule #5: Approach retirement realistically
Many experts make the supposition that you will need to replace between 75 and 80 percent of your pre-retirement income. So, if you earn $80,000 in the year before retiring, you may anticipate receiving little over $60,000 in retirement income. However, that figure may be more or lower depending on the kind of retirement lifestyle you’re planning, the amount of debt you’re still owing, and your general state of health. If you don’t have Medicare or enough health insurance to cover these costs, medical expenses could consume a sizable amount of your retirement savings.
The lump-sum assumption, which states that your nest egg should be about 20 times your yearly retirement expenses that aren’t covered by outside sources of income, such as Social Security or a pension, is another way to calculate how much you’ll need for retirement. You may create a strategy for saving, investing, and increasing your money long before you need to retire by using a retirement calculator to determine your savings requirements.
There are other financial planning best practices to consider in addition to these five criteria. However, they can provide you with a strong basis for long-term wealth accumulation. Your financial advisor can help you hone your plan if you’re working with them. And if you don’t already have one, think about the financial goals you might be able to accomplish by working with an advisor.
Millennials’ Financial Planning Guidelines
It’s crucial to realize that everyone needs to organize their finances. A solid financial strategy enables you to address issues that cannot be resolved by merely saving money. Consider inflation, which is the gradual but constant rise in the cost of goods and services as the economy develops and evolves. Five years from now, the same INR 5,000 will be worth more than it is today. Clearly, all age groups need to prepare their finances, but millennials need to plan their finances more than any other generation.
Millennials grew up with little to no access to financial literacy, despite witnessing the globe adopt technology and the internet at unprecedented rates. As a result, even the fundamentals of personal finance, like filing tax returns or starting savings accounts, may be challenging to understand. A rather unstable financial position is created when you combine readily available credit lines with hazy costs with inexperience managing your bills and repayments.
The economy will continue to shift, as it always has, whether it takes an unexpected development or one that has been building for years. One notable instance is the Covid-19 outbreak, which affected millions of Indians and resulted in a large drop in GDP, unemployment, the suspension of production, and general instability. Perhaps our weaknesses, especially those related to money, came to light at this time. It demonstrated the need for better preparation on everyone’s part because even things that seem certain, like our money flow, can alter at any time. Millennials must abide by certain standards in order to accomplish this.
Six guiding principles for millennials’ financial planning
1. Start small.
When you’re starting off with financial planning, it can seem like a difficult process. That being said, even if you begin slowly and in little stages, you must start somewhere.
A smart first step would be to keep track of your monthly expenses, your income, and the things you are currently spending it on before determining how much you should be spending and saving in light of your long-term financial objectives.
Make a list of your immediate and long-term financial objectives, including anything from requiring a new workstation to wanting to purchase a car or go on vacation. In this manner, you can choose how much money and for how long should be allocated to each aim.
Don’t be afraid to conduct your own research and seek advice from family, friends, and professionals, but keep in mind that you should be the one to arrange your money because you are the one who is most familiar with them.
2. Control your finances
It is important to talk about how much you should be saving because savings are the lifeblood that powers investments, purchases, and financial goals in general. Financial gurus typically advise using a 50-30-20 ratio, where 50% of your salary is allocated to current expenses like housing, transportation, and food, 30% is allocated to personal expenses like clothing and online education, etc., and 20% is set aside for savings.
At this point, it’s crucial to emphasize that there is no one personal finance strategy that works for everyone. Depending on how ambitious your financial goals are, many experts believe that you need save at least 30% of your income in order to sustain your lifestyle after retirement (someone wanting to purchase a car and move abroad would have to save more than someone wanting to purchase a TV and take a correspondence course for example).
3. Attend to the essentials: getting insurance is a necessary.
India has a very low acceptance rate for insurance goods up until last year. Many Indians viewed them as a luxury or didn’t think they were necessary, opting to pay out of pocket because the premium was too expensive. Whatever the justification, we have all discovered how dangerous playing the odds without insurance can be. In unexpected situations, taking care of yourself and your loved ones is not a luxury; it is a must.
In addition to preventing risk, insurance can actually save you money over time if you purchase a policy with enough coverage. This is because paying out of pocket not only costs more, but it can also deplete your savings, setting you back several months.
There are many different insurance products on the market, including liability, health, and term and life insurance. Exploring insurance choices is wise, but not required if you own valuable property. Health and life insurance, on the other hand, are essential and should be purchased after careful consideration.
4. Invest in line with your objectives
Everyone invests differently from one another. Every individual is unique, and their level of risk tolerance will influence their investment strategy. The level of danger a person is willing to face while investing is known as their risk appetite; in general, high-risk investments also produce large returns, whilst low-risk investments produce lower but stable returns over a longer time frame. Whatever you decide to invest in, make sure it aligns with your financial objectives. For instance, investing in a pension plan to protect your later years, or purchasing medical insurance to avoid incurring additional costs out of pocket in the event of an emergency
There are numerous investment possibilities, including gold, bonds, real estate, mutual funds, stocks, direct equity, and many others. Please keep in mind that you should evaluate your resources before making any of these investments. Start small with a Systematic Investment Plan (SIP) if you have little or no money in order to get started without jeopardizing your existing financial situation.
When you start saving more, you can progress to making investments in other possibilities based on how comfortable you are. Instead of investing haphazardly based on what’s popular or what you hear, make sure to complete enough research and invest in accordance with your goals and appetite. What works for someone else may not necessarily work for you.
5. Make a variety of investments.
Although diversifying your investment portfolio may seem intimidating, it is not difficult. You already know what portfolio diversification is if you’ve heard the adage “everything in moderation.” As was just discussed, different investment possibilities come with distinct dangers. Overall, investing in mutual funds would be deemed riskier than doing so in a fixed deposit; nevertheless, the returns on your investment are bigger as a result.
That doesn’t imply you should exclusively invest in mutual funds; you should also invest in other assets that have a lower risk but a stable rate of return in order to balance the risk you are incurring by investing in mutual funds. The main idea is to make sure that you’re never taking on too much risk, that you’re shielded against sudden changes in the economy, and that whatever losses you do suffer are eventually lessened. Although there are many strategies to diversify your financial portfolio, this basic version should be plenty to get you started.
6. Make retirement plans as soon as you can.
One of the key goals of financial planning is retirement planning. Your retirement will directly depend on the kind of savings, investments, and financial decisions you make today. Since most people do not have the security of a pension when they retire, it is crucial to have a source of income to support your lifestyle and keep you independent. None of us will be able to work indefinitely.
The National Pension Scheme or the Post Office Monthly Income Scheme, as well as other, marginally more lucrative, ways to continue to earn and develop your money, are examples of schemes that are expressly meant to assist you during your retirement.
Many people find that financial preparation enables them to reach the life milestones that serve as indicators of success and security. None of us can complete it quickly enough, therefore we should all exert our best effort. Before, it was thought that financial planning was something that the average person wouldn’t be able to understand or manage.
To sum up
Millennials are already aware of the necessity to manage their finances. Nearly half of the 3.6 million new users that Computer Age Management Services (CAMS), a company that services 68% of the nation’s mutual funds, onboarded in the fiscal year 2018–19 were millennials.
We are in a time when everyone has unparalleled access to knowledge and the skills needed to understand and make the most of their financial resources. We have come a long way, from smartphone expense management apps to platforms that let you trade in the stock market directly and without a middleman; it is now our obligation to make the most of our money for our own benefit.
FAQ About Financial Planning
Various Elements That Affect Financial Planning :
- Social Services.
- Monetary inclusion
- Financial knowledge.
- Learning about personal finance.