7 Steps for Planning Your Financial Life

I am a strong believer of managing one’s own money and finances. The simple reason is that it’s your money at stake, and your financial future that’s being planned. Nobody cares more about your money than you do. So if you are not motivated to improve your financial situation, nobody else is going to do so either…not even the best financial planner around.

I manage my own finances and see no reason why anyone else can’t do that on his or her own. This is not to say that using the services of a financial planner is not worth it. In fact, if you can find a good, ethical, trustworthy financial planner, supplementing your financial skills with his knowledge can work wonders for your financial life. Also, being your own financial planner works only if you have the time and energy to put into the job.

There will always be some areas where you would need some professional help, like tax planning. Go ahead and take help here, but make sure you understand what you are being offered, do your own research and ask questions. Anyways, here are 7 simple steps I use to manage my own finances. You can use these to manage your own finances as well.

Step 1: Spend less than you earn. In short, save some money every month.

It’s very important to set aside your savings every month before you use the money for other things, including paying of bills. Always pay yourself before anything else.

The standard rule of thumb is to save at least 10% of your income. In this period of consistently high inflation, I believe a better goal is to aim for 20%. Also, if you’re young, you can follow this rule of thumb – Save 10% of your income for your basic needs, 15% for comfort, and 20% to escape wherever you want.

Step 2: Create an emergency fund. The fund should ideally be around 6-10 months of your household expenses.

Step 3: Buy medical insurance. Health is wealth, but bad health must not destroy your wealth.

Step 4: If you have dependents, buy term insurance. No ULIP, no Endowment, no Money-Back, no Child Plan…just term insurance.

Step 5: Divide your financial goals into “less than 5 years” and “more than 5 years” and allocate your investments based on the duration of your goals:

• For money required in less than 5 years (like for debt repayment, child’s education fee, foreign holiday, new car purchase), allocate your investments among “stocks plus equity mutual funds” and “bonds plus other capital-protection investments” in a ratio of 30:70
• For money required in more than 5 years, allocate your investments among “stocks plus equity mutual funds” and “bonds plus other capital-protection investments” in a ratio of 70:30.

Step 6: Write a Will. If you don’t want to leave you family in the lurch after you’re gone, write a Will. It’s much simpler than what you could imagine.

Step 7: Review your financial goals and investments every 6 months. Review to check if all is well, not to change everything that has already been done.

[The Art of Asset Allocation - Vishal Khandelwal # Page 33 - 35]