Financial Planning for Beginners: Tips for Investments & Savings

Whether you have just started to earn or have been drawing a salary for years now, financial planning is a must. Especially if you are in the new crop of salaried professionals, you might be excited and wondering how to spend your money whenever your salary is credited.

However, most beginners do not have the required financial knowledge to make the most of this money and end up spending frivolously.
Planning your finances is a skill that can be learned at any age and even mastered with time. In this blog, you will find some essential tips, as a beginner, on effective financial planning, budgeting, investing, and much more.

Tips for effective financial management for beginners

Manage your money wisely

Managing your money is not always as difficult as it seems. All it requires is some discipline and commitment. Whenever you receive money, split it up into various heads such as equated monthly instalments (EMIs), bills, entertainment, savings, and so on. This will help you understand where you are spending so that you can cut back when necessary.

Saving money is crucial for financial independence. You can always start small and save at least 10% of your salary every month. Set up a monthly auto-debit if you fear that you may spend that money elsewhere.

Financial planning for beginners is incomplete without discussing the pros and cons of a credit card. While it is handy for short-term fund requirements, if not managed well, it can lead you to a debt trap. So, unless you are disciplined enough, it is best to avoid using it.

Create a financial budget

Create a plan on how you will spend your money every month. To begin with, identify all your sources of income. Then, clearly demarcate between your needs and wants.

Needs are an absolute must, such as food, clothing, shelter, and so on. Wants, on the other hand, are not essential but are good to have, such as watching movies, shopping, or going on a vacation. It is important to allocate a financial budget for both these heads.

Build an investment portfolio

It is advisable to conduct extensive research and spend some time on investment planning. A recurring deposit or savings bank account might not fetch you high rates of interest.

The investment you make every month should ideally be spread over various asset classes such as equity, debt, and cash. While equity is effective against inflation and may provide tax benefits, never rely on just one type of investment.
Diversify your portfolio and consider long-term wealth accumulation.

Once you have a portfolio ready, review it regularly. Set a frequency (quarterly, bi-annually, or annually) and ensure that your investment risk is within manageable limits to protect you from market fluctuations.

Set your personal and professional goals

Financial planning also involves setting objectives that will drive you to manage your money better. A goal will also help you identify your path and chart a course of action.

A personal goal could be buying a house, traveling to your dream destination, or purchasing a luxury car. Make a list of your objectives and segregate them into short-term, medium-term, and long-term.
Then, set a deadline for each of these desires and invest accordingly.

Once you have your personal goals in place, focus on your professional goals and create a clear-cut plan to achieve them. In fact, realising your professional goals will bring you closer to your personal ones.

Plan your retirement

One of the most underrated money-saving tips is saving for your retirement at an early age. While it may seem too far-fetched, if you start saving for retirement now, you can end up with a huge corpus when you retire, thanks to the power of compounding. The more you delay, the higher will be the investment you will need to make to achieve the same returns.

Again, investment planning is key here. Put money in different financial instruments such as stocks, fixed deposits (FDs), mutual funds, and much more.

Keep an emergency fund

Make a habit to save up some money regularly for an emergency. Even if your salary is seemingly low, make sure to set aside a small amount for contingencies. An emergency fund can help you in dire situations and ensure you are capable to meet any unexpected expenses.

Initially, it might seem difficult but if you treat it as a non-negotiable investment, it will soon add up to a sizeable amount.

Avoid landing in debt

One of the most crucial aspects of financial planning is debt management. If done incorrectly, it can have devastating consequences and devour your financial health.
Make sure that you are well-informed of how much you owe to whom. Clear off the biggest debts first. If you have a massive amount payable, then consider a balance transfer and switch your loan to a bank that charges a lower rate of interest.

If you use a credit card, ensure that you pay off the bills in full and do not fall for the minimum balance trap. If you do so, soon enough, the interest will add up to a large chunk of your pay check.

In case you have to borrow, do it for purchasing an appreciating asset and not for a depreciating one. Moreover, if you need funds to achieve certain personal goals, save up for them and pay from your corpus instead of landing in debt.

Tax planning

Tax planning involves investing with the aim of cutting down your tax liability at the end of the financial year. There are several tax deductions and exemptions that can be availed of under sections 80C to 80U of the Income Tax Act, 1961.

Equity Linked Savings Scheme (ELSS) is one of the most efficient ways to utilise the benefits under section 80C. It entails risk but has a short lock-in period and is a diversified equity fund that can also help you earn high returns to achieve your financial goals.

For beginners, spending money may always seem easier than saving and investing it. But it can do a great amount of good if you fight the urge to spend incessantly, swipe that credit card, or take that loan.

Spend smartly, save wisely, and before you know it, you would have enough to call yourself wealthy!

Important tools & Formulae for Beginners in Financial planning

Tools:

• Budgeting Apps: These apps can help you track your income and expenses, identify areas where you can cut costs, and set financial goals. Popular options include Jupiter Money’s app, MyMoney—Track Expense & Budget, and Money Manager Expense & Budget. Jupiter Money helps you with understanding your monthly expenses segregated by various categories.
• Investment Calculators: These tools can help you estimate your future returns based on different investment scenarios. You can use them to calculate compound interest, retirement savings, and loan repayments.
• Financial Planning Software: This software can provide a comprehensive overview of your financial situation, including your net worth, income, expenses, and investment portfolio.
• Online Brokerages: These platforms allow you to invest in stocks, bonds, mutual funds, and other securities.

Formulas:

• Compound Interest: This formula calculates the future value of an investment with interest compounded over time.
  • Formula: FV = PV * (1 + r)^n
    • FV = Future Value
    • PV = Present Value
    • r = Interest Rate
    • n = Number of periods
• Rule of 72: This rule is a quick way to estimate how long it takes for your money to double at a given interest rate.
  • Formula: Doubling Time = 72 / Interest Rate
• Annualized Return: This formula calculates the average return on an investment over a specific period.
  • Formula: Annualized Return = (Ending Value / Beginning Value)^(1/n) – 1
    • n = Number of years

Investment options for beginners

Here are a few simple investment techniques popular in India:

• Mutual Funds: These professionally managed investment pools offer diversification and expert guidance.
• National Pension System (NPS): A retirement savings scheme offering tax benefits and a mix of investment options.
• Public Provident Fund (PPF): A government-backed savings scheme with guaranteed returns and tax benefits.
• Recurring Deposits (RDs): A fixed deposit scheme where you invest a fixed amount regularly, earning interest.

Different Kinds of Mutual Funds in India

Mutual funds have many varieties of funds available for customers managed by Fund Managers. It might seem overwhelming, so we are explaining a few here. Here are a few common types of mutual funds in India:

• Equity Funds: Invest primarily in stocks, aiming for capital appreciation.
• Debt Funds: Invest primarily in debt securities like bonds, aiming for regular income.
• Hybrid Funds: Invest in both equity and debt securities, seeking a balance of growth and income.
• Index Funds: Track a market index like the Nifty 50, offering low-cost diversification.
• Sector Funds: Invest in specific sectors of the economy, such as technology or healthcare.
• Thematic Funds: Invest in themes or trends, like renewable energy or electric vehicles.

Simple tips to save money

• Create a budget: Track your income and expenses to identify areas where you can cut back.
• Cook at home: Eating out can be expensive. Prepare meals at home to save money. Save that 5% & 18% GST on food by reducing restaurant visits and ordering food for online deliveries.
• Reduce unnecessary expenses: Cut back on subscriptions, memberships, and impulse purchases. Binge-watch smartly.
• Use public transportation or carpool: Save on fuel and parking costs. Maintenance is a cost you can’t choose to avoid.
• Negotiate bills: Try to negotiate lower rates for utilities, internet, and mobile phone plans.
• Shop smart: Compare prices, use coupons, and buy generic brands.
• Avoid impulse purchases: Take a pause before making a purchase to avoid unnecessary spending. Keep things in the online cart for a few days before considering absolutely buying that item.
• Set financial goals: Having clear goals can motivate you to save more.
• Automate your savings: Set up automatic transfers to a savings account.
• Find free or low-cost activities: Explore hobbies and activities that don’t require spending.