Why should you make a financial plan?

We all have big goals for our future. Buying your first house, first car, or finally working on the start-up idea you have been sitting on for so long. All of such dreams, however, require a large amount of money. Most often, people fail to realise these dreams due to financial difficulties. Financial planning can help you prepare better for your goals and even for life after retirement. It will also give you an idea of what goals are realistic and possible. Financial planning can seem complex but it does not need to be. And I am here to help you precisely with that.

What is a financial plan?

Simply put, a financial plan lists your current income, predicted future income, and long-term financial goals based on information and expectations of the present. It also predicts the time it will take you to achieve your financial goals at a fixed savings rate (percentage of income you set aside for future use). Before you start creating a financial plan, you need to estimate your current income and expenditure for each month. As a rule of thumb, people who start planning in their 20s should save about 10-15% of their income, people in their 30s should save about 20%, and people in their 40s should be saving close to 30%. This can of course be tailored to your aspirations. Making sure to deposit your savings into a bank account that gives you interest or using your savings for investing will help you tackle the costs of inflation (increase in overall costs of living).

How to get started on creating one for yourself?

To get started, you should list your long-term goals and the expected costs for each goal. Next, you will need to estimate how many years it will take you to save that much money for each target. This helps you figure out what goals are achievable according to your savings rate. Most often you will be left surprised at the amount of money you could save with the compounding effect on your deposits or investments.

How to remain committed to your financial plan? 

Now that you have a basic financial plan, let’s talk about committing to the plan in the long term. The best way to remain committed to your savings goal is by making it automatic. You could ask your employer to deduct a portion of your salary each month and add it to your savings account different from your salary account. This helps, as it takes away the psychological pain of putting your money aside. It is also a good idea to treat yourself once in a while as it makes saving money more rewarding.