10 Golden Rules of Financial Planning For Beginners

While everybody understands the importance of financial planning, few can actually plan their finances well and execute it towards achieving their financial objectives. Unfortunately, there is still a lack of awareness and knowledge when it comes to financial planning.

• Financial literacy is still low in India.
• People are unaware of the process and are often confused with the variety of options.
• Many think they’ll start financial planning once they start earning X amount a month, thus procrastinating their decision.
• Many avoid consulting a professional financial planner.

The last best time to start financial planning was when you earned your first salary or income, the next best time is now.However, it is important to know and follow some rules of financial planning.

• Avoid accumulating debt unless necessary.
• Pay your credit card bills in time and refrain from using the credit rollover facility.

• Start With Saving Habits Effective money management starts with healthy saving habits. You can start with regular and systematic savings by putting aside at least 10 per cent of your monthly income toward savings and keep building the corpus amount over time. This fund can also double up as an emergency fund for you.
• Avoid Debt Accumulation Small and seemingly harmless borrowings and credits can quickly become out of control and eventually snowball into large debts. As a result, you might find yourself in a perpetual debt trap. Therefore,
• Set Practical Goals Classify your financial goals as short-term or long-term goals. For example, buying a vehicle can be a short term goal, while buying a house can be a long term goal. Analyse how much amount you need to achieve these goals.
• Invest No one has ever become rich or financially independent by just accumulating savings. While savings is an integral part of financial planning, you also need to invest wisely to grow your wealth. You can consider various investment instruments to invest your savings.

• Prepare a monthly budget and segregate them into separate buckets such as rent, grocery, electricity. Try to stick to the budget but always keep a variation scope of 10-15%.
• Categorise your earnings under various headings and sub-headings like expenses, investments, leisure, emergency fund etc.
• Avoid compulsive buying.
• Resist yourself from buying unnecessary or avoidable things. You can do this by creating a buying list starting from the most necessary items to the least important items.

• You can use your surplus cash toward achieving your pre-defined short term goals or even your long-term goals. This can help you to prevent buying something which was not on your goal.
• Since the surplus cash is generally not accounted for in your monthly budget, you might consider investing it as per your risk appetite.

• Don’t put all your savings into one of two asset classes. Simply put, diversify your wealth.
• Use various mutual fund types to distribute your investment allocation.

• At a young age, people tend to have lesser responsibilities that make retirement planning easy.
• You get a long tenure to build your retirement corpus. Therefore, you get to build a larger fund along with the benefit of compounding.
• While inflation can silently erode your savings, you can minimise its impact by investing in long term retirement planning options that can generate inflation-beating returns.
• The premium amount for any retirement plan is low for younger people than it is for older people. The same is true for Monthly SIPs.
• As you grow old, you will start shouldering responsibilities in the form of marriage, children, caring for your old parents, and so on. Therefore, you can find saving for your retirement a tedious task.

• Start by preparing a list of all your lenders and how much debt you owe to them.
• Prepare of schedule of payment to your lenders.
• If you have to pay to multiple lenders, you can start by paying off the debt with the highest interest rates.
• Make debt payment your priority after getting your salary.
• You can also consider consolidating your debts by taking a single loan to pay off multiple debts and then keep paying off that loan.

• Term Insurance It is the purest form of insurance that does not provide any survival benefits. However, you can have a large insurance cover by buying a term plan.
• Life Insurance You can buy life insurance that can provide adequate cover to your family when you are no longer around. You also get survival benefits from such insurance. The sum assured should be ten times your annual income. Any lesser amount may fall short of serving the purpose of financially safeguarding your family.
• Health Insurance The cost of medical care and hospitalisation is going through the roof, and it is expected to keep rising in coming years. As a result, any medical emergency can potentially drain your savings.Therefore, take adequate health insurance and try to increase the coverage amount every year. Furthermore, try to get useful add-ons like accidental death benefits, post-hospitalisation treatment, etc. Moreover, ensure that your health insurance covers some critical illnesses that are hereditary in your family, making you prone to them. This will give you peace of mind. You should note that risk coverages do not yield returns, but they are equally important as they act as a safety net in the wake of any misfortune in your family.

• The Equity Linked Savings Scheme, or ELSS in short, can be a good option for investing your money as well as availing of income tax exemption under Section 80C. Furthermore, ELSS schemes have the shortest lock-in period among all other tax-saving options available under this section.
• You can also claim income tax deduction under Section 80D on your health insurance. Section 80D deductions are over and above the deductions claimed under Section 80C.

1. Money Management People, especially those from a non-finance background, can often consider money management a tedious task that requires specialisation. Nothing can be farther from the truth. You only need a certain level of financial awareness and commitment to excel in managing your money. Remember, If you can earn it, you can manage it as well.
2. Ideally, your investment should have the right balance of risk and safety. You can consider monthly SIPs (Systematic investment plan) in equity and debt mutual funds for this purpose. While equity funds can give you the stock market exposure and hence higher return potential, debt funds can ensure the safety of your capital.
3. Control Your Expenses You are not in control of your expenses if you are unable to retain any money from your last salary by the time of your current salary receipt. This is a situation where you are likely to get into a financial deficit.The following points can help you control your expenses.
4. These points can help you in getting a clear picture of how you are spending your money and where is the potential leakage.
5. Maintain an Asset-Liability List Maintaining a personal finance balance sheet does not require any training. You can start preparing one by isolating your assets from your liabilities. Simply put, the tangibles you own is your asset, and the money you owe to someone is your liability.Your asset includes, but not limited to, your bank balance, investments, the value of your property, etc. In contrast, various types of loans, credit card balances, rent payments, utility bill payments, etc., are your liabilities.Once you have prepared your personal finance balance sheet, you should steadily work towards reducing your liabilities and enhancing your assets.
6. Deploy Your Surplus Cash Properly You may, at times, get surplus cash via receiving arrear payments, bonuses, cash rewards, etc. It is natural to think about spending this surplus cash on items that you might not need.However, this may lead to overspending. You can avoid such overspending if you have a prior plan to deploy such surplus cash.
7. Create an Investment Portfolio Find out the various investment options such as equity, debt, cash, real estate, gold, etc. Assess the risk involved with each of these investment options. Analyse your risk-taking ability after you have an idea of the risks involved with all wealth-building options.Choose the appropriate investment options to start building your portfolio. Follow some basic investment rules while building your portfolio.
8. Start Retirement Planning Young people often delay planning for retirement thinking they have enough time to think about it later. However, retirement planning should ideally start right from your first earnings.
9. Hence, it is good to start early, which gives you the leverage of time.
10. Debt Management It is practically difficult to remain free of debt during your entire career. You might need to borrow money at some point or another for various purposes. However, you can miss achieving many of your life goals if you don’t know how to manage your debt judiciously.
11. Cover Your Risks No amount of planning can protect an individual from unforeseen risks such as loss of property and life. Any unfortunate event can risk the family and dependents of an individual into a financially uncertain future.Therefore, it is imperative to have adequate financial cover to mitigate the effects of such unwanted incidents in future.
12. Plan Your Estate Estate does not necessarily mean a vast property comprising land and buildings. All your assets comprising your vehicle, home, bank balance, investments, jewellery, etc., are part of your estate.Contrary to popular belief, estate planning is not just for wealthy people. Since you have built your estate, it is your legacy, and hence, it is your responsibility to plan a smooth transition of your estate when you are not around. After all, you can't afford to leave your asset to people other than those meant to receive your legacy.The best way of planning your estate is to prepare a detailed will. Your will should clearly state every asset you have and to whom you want to leave them to and in what proportion. There should be no anomaly or scope of multiple interpretations in your will.You can avail of the services of a good and experienced lawyer to draft and execute your will.
13. Know Tax Planning Options Tax planning is an indispensable part of any personal finance. The lack of knowledge can result in paying unnecessarily high taxes instead of availing of cheaper options.The Income Tax Act can allow different tax exemptions, deductions, and benefits that can be availed of in reducing your tax liabilities in a financial year if you choose the old tax regime for filing your income tax returns. These tax deductions are classified under various sections starting from Section 80C to Section 80U.For example,
14. Therefore, you can minimise your income tax liability by availing of such tax benefits. However, you must refrain from indulging in any type of tax evasion to save taxes.

You may have noticed by now that there are a lot of financial instruments to choose from at many stages that can be useful in financial planning for beginners as well as experts. While many firms provide such financial instruments, it is always advised to go with the reputed financial service providers.You can visit the website of such firms to know the list of options they offer. Such firms also have financial experts to quell any doubts that you may have.

Planning your finances should be a part of your life. Apart from helping you become a better manager of your finances, financial planning can also help you become financially independent earlier than expected.Once you get involved in the process, you will keep learning and improving your skills and ultimately become wiser with your finances. Now that you are armed with the knowledge of how to plan your finances, you are ready to begin your journey with conviction.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.