Financial Planning for Young Individuals

Introduction

Many adults sense the lack of financial education in school which has a painful consequence. Having basic financial knowledge is important to live a happy and peaceful life. Moreover, individuals must learn about Financial Planning at a very young age, as it builds a strong foundation. This helps them to attain financial independence and reduces their risk of insolvency (i.e. inability to pay debt). Most young Individuals do not have the faintest idea about the basic financial terms such as debt, investment, mortgage, net worth, assets etc. Learning things early and implementing them in the real world early is the best way to strengthen our financial knowledge. Also, Financial Crisis can be avoided if an individual start planning finance at a young age.

What is Financial planning?

Financial planning is determining your financial situation and planning ways to allocating your incomes/inflows. It helps us Monitor Incomes and Expenses, Avoid Debt, Plan for future, Manage cash flows, etc.

Budgeting

Most of us do not realize that we spend more than what we earn, which gives way for debt to come in. Thus, balancing your income with our expenses becomes important, so that you don’t spend more than your Income. Budgeting is the process of itemizing and planning your income and expenses over a period of time.

Budgeting Steps

Step 1: Assess the Current Financial Situation

Understand your financial capabilities i.e. the NET WORTH

NET WORTH = ASSET (What you Own) – LIABILITY (What you owe)

Make sure your financial plan is aligned with your financial situation.

Step 2: Track your Expenses

It helps you picture where your income is going

Step 3: Set Personal Priorities and Financial goals

Classify your goals into short, intermediate and long term goals which should include saving, investment and spending.

Step 4: Make a plan for your goals

Plan as to how your goals are to be executed

Step 5: Make adjustments

Your planned expenses and actual expenses may vary thus make the necessary adjustment in your budget.

 

Savings

When an individual is stressed about money, it often signifies a lack of savings. Which is required to meet future expenses and helps us protect in the event of financial emergency. Generally saving is the lowest priority, individuals save whatever money is leftover. That is why they save very less. Thus automate your savings, let savings be your priority and allocate a particular percentage of your income to your saving account.

Emergency saving: During Job loss, Medical Emergencies, etc.

Short Term saving: Daily Expenses, Running the house, etc.

Long term saving: House, Land, car, etc.

Investing

Investing is allocating resources with an idea of earning profit. As we know that the money we have now is worth more than the value in future. For instance, if we can buy 4 Apples with Rs. 100 today we can buy only 1 Apple with Rs. 100 in the future. Thus the value of Rs 100 is more today. This is known as inflation. Inflation tells investors how much return their investments need to make to cope up with the economy.

There are various types of investments such as Stocks, Bonds, Investment Funds, Real Estate, Precious Metals (Gold, Diamond, Etc.) Bank Products, Options, Mutual Funds, Fixed Deposits, Annuity, Retirement, Saving for Retirement, Insurance, Etc. Each type of investment has its own set of features varying in the risk, returns, time horizon, interest, etc.

But Before investing you should have adequate information about the investment. Also never be shy to ask for any financial advice/help.

What is your Money Personality Type?

Understanding your money personality is the first step to your financial health which will help you make a smart decision in budgeting, saving and investing. You can identify two or more money personality profile as it is possible for people to have overlapping money personalities.

Types of money personalities are

1) Money Hoarder

If you are a Money Hoarder, you like saving money and enjoy being organized with your finances by working with budgets and reviewing them regularly. You always prioritize your financial goal over anything else. Also, you find it hard to spend on things such as gifts, entertainment etc.

2) Spender

If you are a spender, then you tend to buy all the things that you desire for. Thus it gets difficult for you to save money and invest for future requirements. This may lead you in debts

3) Money worrier

If you are money worrier, you would worry about money all the time with a fear of losing it. You wish to have control over your money.  Also, you keep checking for account balances and budgets to make sure your financial health is not at stake.

4) Money monk

If you are a money monk, you believe that money is bad and is the root of all evil problems. You fear that money may make people self-centred, greedy, egoistic etc. Also, you fear investing as you may become wealthy and being wealthy is not your preferred status.

5) The Amasser

If you are an Amasser, you wish to be wealthy and works hard to accumulate money. You feel incomplete if you don’t save or invest. Also, you feel down and depressed if you do not have enough money.

6) Money avoider

If you are a money avoider you have a hard time paying bills, budgeting, keeping track of income and expenses etc. You avoid investing money and have no idea about the amount of money you own or owe. Managing finance seems boring to you

What is your money personality? Once you understand your money personality and modifying your behaviour according to your financial standing. It will help you achieve your financial goals.

Conclusion

Take time to understand the concepts of finance and plan it accordingly. Once you have defined an efficient plan you can stick to it throughout your life. On the other hand, not planning finance can be extremely expensive which may lead you to debts. It takes time but it is worth it.