Financial planning can often feel like an uphill battle. Budgeting, saving, debt management, and investing — it’s a lot to take in. Before you delve into the technicalities of financial planning, learn some basic do’s and don’ts. This will help you avoid common pitfalls and pave the way for financial independence.
Let’s take a closer look.
Do Make a Budget
Many people think of a budget as a restriction. The idea of continuously tracking where your money is going sounds intimidating. In reality, budgeting is anything but a nuisance. It is a tool that can give you control over your financial situation and set the foundation of a successful financial plan.
Start by calculating your average monthly income and all your fixed expenses, including rent, utilities, mortgage, child care, and insurance. Allocate a specific amount to each expense. You can also follow the 50/30/20 rule, where you allocate 50% of your income to needs, 30% to wants, and 20% to savings or debt repayment.
Do Create an Emergency Fund
No one plans on getting sick or losing their job all of a sudden. But life happens, and planning is the only thing that keeps the cash flowing. The best thing you can do is to create an emergency fund.
Set aside three to six months’ worth of living expenses in an easily accessible savings account. This is your safety net. With an emergency fund, you don’t have to dip into your long-term savings account frequently.
Do Learn Financial Literacy
Whether you’re in your 20s starting your first job or in your 40s thinking about retirement, financial literacy is the key to success. It gives you the skills and confidence to make financial decisions for yourself and your family.
For instance, financial literacy classes focus on key areas, such as saving, budgeting, investment, debt repayment, and portfolio diversification. You’re taught to handle economic uncertainties to protect your financial future. Intuit has numerous financial literacy courses designed for all ages and professions.
Don’t Confuse Wants With Needs
We live in an age of influence. Consumerism is on the rise, and the temptation to buy the latest product is ever-present. If you want to create a strong financial safety net, learn to differentiate between wants and needs.
For instance, if you’re making a budget, put needs above wants.
Don’t Underestimate Inflation
Lifestyle inflation is real. Many people advance in their careers and earn more money, but spend it all instead of increasing their savings proportionally. There is nothing wrong with upgrading your lifestyle over time, but do contribute more and more towards savings. Inflation is eroding the value of money, so take up side jobs to boost earnings.
Don’t Delay Retirement Planning
Many people avoid thinking about retirement until it’s only 5-10 years away. Retirement may seem far away, but it’s important to start planning as early as possible.
First off, you can take advantage of employer-sponsored retirement plans. With plenty of time on your hands, you can look into various investment options and build a diverse portfolio. In short, early retirement planning pays off and promises financial independence.
