In: Finance
Six steps of how to take control of your finances, discuss the methods for managing your own personal budget and list your financial goals.Rate yourself on how well you are meeting those goals.
Explain the importance of planning for retirement
Explain the importance of having money available for life's unexpected problems.
I think financial planning is need of the hour and is one of the most essential things around the globe. Everyone right from a single student in his junior education to big Multinational giants of corporate world are concerned about how to plan their finances. According to me following are the six steps: These might be in a different priority for person to person btu more ot less these are same
1. Organising your records: This is first way to take control of your finances. To organise all of your records well and good. Records should be placed all thogether and safe so that you can check them anytime to refer to your past finances.
2. Know your income and develop a spending plan:- You should be aware of how much do you earn and how much do you intend to spend. Basic equation that we follow here is Y = C + S. Y is the income and C is the consumption while S is savings. IF you know your income and consumption you can easily estimate how much you can save for future by cutting consumption today. If C > Y it means you need a loan. But its always better to avoid loan and fulfil your needs through your income. So develop a tentative plan for how much you should spend on what. This would change time to time based on situations but a tentative plan helps you in making decisions.
3. Determine Your net Worth:- A part of it we talked above that we should know our income. Moreover we shoud know what are the available resources with us that can generate finances for us. Also this might help you know how can you improve your current financial status. Some people tend to own real estate or some tend to own company shares or some invest in Gold that might improve their financial condition and can be used as finances when needed. So this is all about assets and income parts.
4. Look for a source to finance. Should you take a loan??:- Now this is an optiional step. If you stop at above 3 its good but if you reach here then you should first ask, are you ready to take a loan? For this you can use debt-to-income ratio.
Debt- to-income = total monthly debt obligations to be fulfilled / Net monthly income.
This might help to know if you are in a situation to take a debt and will you be able to tackle its obligations in future. Its generally said that this ratio should be less than 40% to take the debt.
5. Manage spending now: If you have decided to take the debt then simply observe formula carefully. If we increase net income by reducung spendings as much as possible then lesser is debt-to-income ratio. So for this you have to again plan and manage your spendings.
6. Summarize your current financial situation: You should again list your financial goals and sumarize current financial situation and this might give you some way to control your situation as it will need patience form you to keep calm and keep working towards your goals. This is always better to do before going forward for any financial decision.
Retirement planning is quite essential. It provides you with retirement income to sustain for your remaining life. Its always better to plan for it in prior while you are earning and start saving for it while you are well enough to earn. After retirement you won't be as much able to earn as you were before and many people don't want to be dependent on their children in their old age and hence go for retirement planning so that they could sustain their life on their own. In this an estimate for retirement income is made keeping in mind various factors like inflation etc and amount is estimated that should be saved currently to have certain income later.
Life is quite unexpected and hence one should be prepared for that. e.g- there are mediclaims for any medical emergency that is faced by anybody. A huge amount is availed immediately through mediclaim. Its a type of insurance. Similarly life insurance is for unexpected death of a person from family. These are a few examples where money is availed immediately to carry on life and won't stop due to unavailability of money. Hence such type of planning is also quite essential.