Financial Planning for Salaried Employees: Tips & Importance
Personal financial planning provides you with a systematic roadmap for achieving your goals without facing any monetary roadblocks. If you are a salaried employee, equipping yourself with an effective financial goal becomes more important. It ensures a balance between achieving financial independence and securing the future for your close ones.
Thus, if you are new to personal financial planning and confused about starting, check this article to get your answers.
What Must a Personal Financial Planning Include?
- Financial Goal – This includes the short, medium and long-term goals.
- Net Worth – Determining total assets and liabilities is important.
- Budget – Create a budget based on needs, wants and savings.
- Plan That Suits You – Plan according to your age - beginner, intermediate and experienced.
- Invest in Emergency Fund and Retirement – Create a rainy day fund and save to meet your post-retirement expenses.
This list is not limited here. To know more, continue reading.
6 Best Ways to Create Personal Financial Planning
1. Assess Your Financial Goal
The first step to financial planning for salaried employees is to determine what their financial goals are. So, break it down into long, medium, short terms to organise your budget.
- Your long-term goals involve 10 years or more, including your retirement plans.
- Medium-term goals are the ones that you want to achieve in the next 5 to 10 years. It includes initiating your own business or managing your budget.
- Set the short-term goals you want to achieve in the next 5 years. It ranges from consolidating your debt to fulfil your dream to purchase a car.
Now, categorise your financial goals into three:
It is important to prioritise what are your immediate needs and what you need to concentrate on later.
2. Calculate Your Net Worth
Your net worth is the baseline to start personal financial planning. First, assess your salary, liabilities and other expenses. Now, calculate the assets minus liabilities to get your total net worth.
3. Draw a Budget
The purpose of a budget is to create a framework based on your net worth and meet your life goals accordingly. With this, analyse your cash flow through a 50/30/20 thumb rule.
The 50% must be assigned to meet the day-to-day expenses. It includes your rent, food and others.
At the same time, 30% must be allocated to significant expenses but are not immediate. For example, it involves dining out or purchasing a new phone.
Finally, the last 20% must be devoted to savings to reserve emergency funds for your retirement or repay your monthly instalments.
4. Manage Your Savings
As savings is part of your budget, make sure to plan it effectively. For example, if you have started your career, 10% of your post income must be allocated to savings.
As the income increases, increase your savings to 15%. As the age progresses, meet your increasing financial liabilities with 35% of your savings.
However, there are exceptions to the specified percentage. Nevertheless, the effective allocation of savings as per your requirement is an important move to manage your debt.
5. Plan Your Retirement
An individual's retirement plan depends on the age and the monthly expenses post-retirement.
For instance, an individual decides to retire at 65 years of age, and his monthly expenditure stands at ₹50000. Accordingly, he must invest in SIP (return of 12%) for consecutive 30 years to earn approximately ₹1 crore to meet his post-retirement expenses.
Financial experts suggest that one must target a retirement accumulation of 20 times one's annual income. This old rule of thumb considers income and not expenses.
Thus, keeping in mind the importance of retirement planning, draw your retirement plan according to your present expenses and scenarios.
6. Save for Emergency
Effective personal financial planning must reserve funds to meet emergencies. It is ideal to save for 3 months in advance. However, experts recommend considering 6-month to save in a savings account that can be accessed whenever any needful situation arises.
Plan Your Finances as Per Your Age
If you have newly joined your company, it's crucial to learn the art of personal financial planning from the day you start earning. Follow the basic rules as mentioned above and take a look at few tips:
Create a Personal Balance Statement
You may be willing to splurge with your first earnings. However, it is essential to keep track of your expenses. Hence, maintain a personal balance statement based on the 50/30/20 rule.
List down your assets and liabilities accordingly. It may include your current bank statement, your ongoing education loan and more.
Based on this list, you will conclude how much you need to spend and save. Additionally, begin investing in assets that increase wealth and require low maintenance costs over the years.
Avoid Debt Trap
If you borrowed a loan to fund your education or others, make sure to repay it first. Borrowing multiple loans at a time increases the risk of default in repayment. To maintain disciplined personal financial planning, make sure to take a credit that you can easily repay.
Financial experts recommend that your loan burden must not exceed more than 50% of your income. Also, make sure to increase your monthly instalment in line with increasing income. This helps you to repay your debt in a shorter period.
As the age progresses, an individual is responsible for handling his finances and securing his family's financial well-being. Hence, note these following tips to maintain disciplined personal financial planning in your 40s.
Create Investment Portfolio
To meet your additional expenses, instil a habit of investment. Equity investment is one of the mediums to save on your tax payables. If you are a beginner, consider investing in hybrid mutual funds.
Although, depending on your risk appetite, diversify your investment portfolio to avoid market risk. Consider an investment horizon of 10 to 15 years. It is also important to balance it annually or every 6 months.
Plan for Tax Payables
Being tax-aware and creating a tax plan is important to know how much and when it is deducted. At the same time, make sure to invest in assets like mutual funds, PPF, etc., to multiply your wealth and save on tax payables.
According to a survey in 2021, 51% of Indians don't have a retirement plan. Estimate your expenses post-retirement. Accordingly, create a plan and invest. Also, focus on estate planning.
Take note of the following insurance cover to secure your old age:
- Life Insurance
- Health Insurance
- Social Security or Lifetime Annuity
- Long-term disability coverage and more
However, before moving ahead, here's a quick disclaimer. Experts recommend contacting a financial adviser to make an informed financial decision.
Investment Plan for Short and Long-term Finances
Accumulate wealth corpus by dividing your financial planning into short and long-term periods. Accordingly, plan your investment to increase your financial strength. Select from the following investment mediums depending on your risk appetite and time horizon:
Get optimum returns in a short period with these three investment mediums:
- Recurring deposits are ideal for individuals who don't want to invest a lump sum in a go. With a minimum tenure of 6 and a maximum of 10 months, the interest you earn is taxable.
- Fixed deposits offer guaranteed and fixed high returns. It is because deposits are independent of market fluctuations. Also, you can access the deposits during an emergency after a penalty payment.
- National Savings Certificate can help you to earn tax exemption from taxes under Section 80C. The investment tenure is around 5 years.
Keep your long-term financial goal in mind and invest in the following to avoid market volatility:
- Growth Stocks - Find the perfect company before investing in a growth stock. It comes with higher risk and returns. You need to commit to a time horizon ranging from 3 to 5 years.
- Dividend Stocks – The returns that you get in these stocks is not as high as growth stocks. It is popular among matured investors as one receives a regular return and involves less risk. One can get returns ranging from around 2% to 3 % annually. Real Estate Investment Trusts is one such popular dividend stock.
- Target Date Funds- This investment form is ideal as your retirement progresses. It gradually progresses to bonds as the target date approaches.
9 Financial Applications to Aid Personal Financial Planning
A working professional's day-to-day-busy routine may prevent maintaining track of personal finances. Thus, take help of the following applications to discipline your financial lifestyle:
- Personal Capital
- You Need a Budget
- Clarity Money
- mTrakr etc.
Tackling money for a beginner can be cumbersome. Hence, effective personal financial planning is important. Admittedly, the tips mentioned above are not necessary to fit all. However, keeping these tips in mind will serve as a guide to draft the best financial planning for salaried employees.