Financial Planning for Salaried Employee
Everyone wants to have a financially secure future, but life is full of competing priorities – some planned and some unplanned. Most of our important life events are planned – things like buying a house, having children, paying for their education and weddings, and having enough money for a comfortable retirement. But when an unexpected event occurs, it can drain your finances, especially if you are salaried with a constant month-end financial crunch. In such a situation, a financial plan helps you stay on track and puts you back in control, ready to face whatever life throws at you.
If you are salaried and new to personal financial planning, this article is for you. Read on.
If you are salaried, it’s important that:
- You save money from salary before spending it on your monthly expenses.
- You understand that managing personal finance, saving and investing are crucial if you want to achieve your goals without facing any financial setbacks.
- You understand the difference between saving vs investing, if you want your money to bring in more money for you.
Start Saving For All Your Needs Now!
What are the basic fundamentals of financial planning?
The basic fundamentals of financial planning include financial management principles that work in a good and bad economy and under any financial condition. Financial planning begins with goal setting, saving, and working toward growing your investments.
To ensure that your future is financially secure, you need to include the following in your financial plan:
- Retirement Plan: Your financial plan should include a strategy to accumulate the wealth you’ll need in retirement to live a comfortable life.
- Investment Plan: You need to have a diversified investment portfolio that can withstand market volatility and inflation.
- Risk Management Plan: This plan includes health, life, property and casualty insurance and coverage.
- Tax Reduction Strategy: This strategy is optimised to minimise as much tax as possible.
- Wealth or Estate Plan: Your financial plan must include arrangements for the benefit and protection of your heirs.
How to Create A Personal Financial Planning for Salaried Employee
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Calculate Your Net Worth Your net worth forms the baseline of financial planning. To determine your net worth, here’s what you need to do:
- Assess your income, your liabilities and other expenses.
- Your Assets – Your Liabilities = Your Total Net Worth.
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Develop Your Financial Goals Determine your financial goals and break them down into short, medium, and long-term goals.
- Short-term goals: They are set to achieve in the next five years. Example: Purchase a car.
- Medium-term goals: They are set to achieve in the next 5 to 10 years. Example: Create an emergency fund.
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Long-term goals: They are set to achieve in the next 10 years or more. Example: Retirement plans.Next, categorise your goals into these 3 categories:
- Needs
- Wants
- Savings
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Draw a Budget A budget creates a framework based on your goals and your net worth. It makes your cash flow go through the 50/30/20 thumb rule. According to the rule:
- 50% of your income is to meet your day-to-day (essential) expenses. Examples: Food, rent, etc.
- 30% of your income is for significant expenses that are not essential. Examples: Buy a phone, dining out, etc.
- 20% of your income is dedicated to savings. Examples: Saving for emergency fund, retirement, or to pay off debt.
- Prioritise Savings The 50/30/20 rule is just a loose guideline, but you can choose to tweak this rule to make savings a priority so that you meet your goals faster. Consider putting aside money in the best saving schemes before you start making any non-essential purchases
- Plan Your Investments Once you begin saving, consider investing it for better returns. This will help you achieve your goals faster. When it comes to investments, you have a lot of investment alternatives. However, make sure that your investment portfolio is a mix of different asset classes and types, including both high risk and low-risk investments. This diversification will help reduce the risk of losing money due to market fluctuations.
- Save for Emergency Successful personal financial planning needs to have a plan to reserve funds for emergencies. According to financial experts, an emergency fund should ideally have 3 to 6 months of living expenses.
- Plan Your RetirementYour retirement plan should depend on two things: your age of retirement and your monthly expenses post-retirement.Financial experts recommend having a retirement fund of 20 times your annual income. However, keep in mind your present expenses and inflation when drawing your retirement plan.
Start Building Your Financing Pool Now!
Invest in Insurance Coverage
Insurance protects you and your family in times of need. The two popular types of insurance most people invest in are:
- Health insurance
- Term insurance
Clear Your Debts to Avoid Debt Trap
If you have taken a loan, make sure your financial plan includes a strategy to pay off the debt. According to financial experts, your loan burden shouldn’t be more than 50% of your total income. If the debt is overpowering, then you may find it difficult to make repayments, making it easier for you to get caught in a debt trap.
- Make sure that you increase your debt repayments in line with your increasing income. This helps you repay your debt sooner.
- Consider using the snowball method (clear off low-interest debt first and then move on to the next) or the avalanche method (pay off the high-interest debt first and then move on to the next) to pay off your debt strategically.
Get Started With Passive Income
Passive income is earning money with little or no effort. While passive income may not make you rich, it can be a profitable and reliable income stream you can have for the long haul. Passive income is important because it:
- Helps you achieve financial freedom
- Improves financial stability
- Reduces stress and anxiety
- Secures your financial future
Financially securing the future for yourself and your family is your right. Effective financial planning utilises your hard-earned money in the most efficient manner so that it helps create a financially secure future. The above financial planning strategies are extremely useful for a salaried employee to build an economically stable life.
