Personal Financial Planning

David was always careful with his money – he knew exactly what his income was and he used to make sure that his expenses would not exceed his income. In fact, every month he would set aside some of his savings which he would use for his yearly vacation. David also contributed some amount to his 401k though he was not sure of how it worked. Nevertheless, he thought his financial plans were clear and that he was on solid financial ground.
Many of us tend to think like David does and believe that once we follow our budgets and are not in any major debt, we are doing fine. However, financial planning is not just about managing expenses or avoiding debt, though they are an important part of financial planning. Financial planning should also include a clear plan towards achieving future financial goals like buying a house, children’s college education, retirement plans and many more.

Here are some of the basic principles of personal financial planning.

1. Budgeting – The most simple rule while working on a budget is to make sure that you spend less money than what you earn. Only when you create a budget will you be able to see clearly what you mostly spend your money on and how much you manage to save every month. This will help you in planning where your money should actually go and to take steps to ensure that there are no unnecessary expenses.

2. Managing Expenses – Any talk of a budget is incomplete without talking about managing expenses. Very often, at the end of creating a budget, people are surprised to see that expenses they thought were very small, had added up little by little to form a fairly hefty amount. Managing expenses is all about reducing where you can and eliminating unnecessary expenses.

3. Avoiding Debt – If you stick to your budget and manage your expenses carefully, you will most certainly be able to live within your means and even put aside some savings every month. This will help you to avoid debt and even if you do have to take some loans like a home mortgage loan or a student education loan, you will be able to pay them off without putting too much pressure on your budget.

4. Retirement Plans – It is very important for you to plan for your retirement, especially if you want to make sure that you continue with the same lifestyle as you do presently. You should make use of plans such as the employer 401k plans where your contribution will be matched to a certain extent by the employer and which has some special tax advantages.

5. Insurance – You may now truly believe that you have covered almost all the important aspects of a financial plan. Well, not quite. You have made substantial progress but there still remains one important aspect that needs attention. Whatever you have earned, saved and invested needs to be protected against accidents and natural disasters. You need to have adequate insurance coverage to provide for your family, to protect your ability to earn and to make sure that you will always have a roof over your head.