ABC’s of Financial Planning

We usually have a love and hate relationship with money. We love it when we have it and hate it when we don’t! I usually see people complain about how money dictates and destroys our lives. I don’t believe money is everything but it definitely does make our life better.  

Just imagine a situation where we are paying our bills on time, managing birthday gifts for our friends, using our saved money for repairing our broken phone, saving for upgrading our bikes and still not broke! Doesn’t this sound like a good position to be in? 

I’m sure with the changing times our necessities and goals will change. From upgrading our bikes to upgrading our house, from managing birthday gifts for friends to managing birthday gifts for our children. But for all this, we need to start taking charge of our finances and plan it proactively and wisely.

Especially in the context of Nepal, we see people sacrificing their passion for their profession and blaming the money for it. But just analyze the root cause of the problem. Money did not create havoc, it is us, who are not able to handle our money. 

So what should we do?

Firstly change your attitude towards money! Don’t think of money as a means for living life, but think of money as a way of creating a better future for you and your loved ones. Understand that managing your money early will help you move towards the path of financial wellness. Here are 6 steps about how you can take charge of your finances.

1. Get organized and set your Financial Goals

Having clearly defined goals makes the journey of financial planning much easier because you will be clear on what you want to achieve at the end of a certain timeline. Start by analyzing your short term and long term goals. While preparing a goal, don’t be too strict because that’s where most people lose track. Make it exciting because that is something you’ll be working to attain. Follow the SMART method to prepare for your goal.

• Specific: Specify “THE ONE THING” that you want to achieve. For example, I want to save 5 lakhs for my Masters. 
• Measurable: To save Rs. 5 lakhs in the coming 3 years, I need to save 14,000/month
• Achievable: I can achieve this if I start taking lunch from home and only shop when it’s ABSOLUTELY required. Also, I will not purchase anything that costs above Rs. 2000.
• Realistic: Instead of buying new clothes, I’ll try to use my mom’s old sari to make clothes. And will take the leftover dinner for lunch.
• Timely: I will pay off all my bills the very next day of getting my salary and transfer the 14,000 to my other savings account (transfer to an account that doesn’t have a card and internet banking).

2. Track your income and spendings

Knowing where you stand now will help determine the next steps you need to take to achieve your goals. When you’re collecting information, start with fixed expenses like your rent and utility bills. Then look at your spending history to get an idea of what you normally spend on. And of course, you’ll want to have a clear sense of your income, including your paycheck and overtime income.

3. Create a budget

Creating a budget is very important for managing your money and achieving financial wellness. A well-constructed budget is something that everyone could and should have because this will help you understand your cash flow and your lifestyle. You can start with a notepad or spreadsheet. Note down your income and expenses. You can also segregate expenses into fixed and variable. This will allow you to get an in-depth idea about your expenses and guide you on where you can cut down your expenses. For reviewing your past monthly expenses, you can take the help of those bills on your bag or refer to your bank statement. 

4. Reduce spendings and manage your debts

I strongly suggest you pay off all the fixed expenses as soon as you get the salary (if possible the same day or at least by the next day) and allocate funds for everyday expenses as per your budget to your everyday transaction account. Regarding the variable expenses, everyone likes a good deal, but just because something is on sale doesn’t mean it’s worth the money. Restaurants are opening at every corner, but it doesn’t mean you’ll have to try everything. Unfollow those food bloggers and influencers if you need to. Cut off on those junks, start taking lunch from home. This is not only good for your financial wellness but is also good for your physical and mental health. 

Also, financial planning doesn’t mean that your liability needs to be zero. It’s okay to have loans if you are managing them properly. But if you want to pay off your debt, then start with the smallest balance first or repay the debt with the highest interest rate. If you are confused between these two, take out your pen and paper and start your calculation.

5. Start saving

To manage your savings, it is a good idea to have separate savings account as per the objective. I strongly suggest you have at least 2-3 savings accounts.

• “Goal Saving” Account: This needs to be your priority. As soon as you have your salary, transfer the amount to this account (amount planned while analyzing your goal). Taking the above example, transfer 14000/month to this account.
• Everyday Transaction Account: You can manage your everyday transaction from this account. For eg: all those variable expenses.
• “Emergency Saving” Account: I strongly suggest you allocate funds for emergency savings. This will be the fund that you’ll be using to repair your bikes, to change your broken phone screen or maybe for any other emergency.

If you have enough money, I’d also suggest you create a separate account for future investments. Investment is a big part of financial planning. So, allocate your budget for future purchase of IPO, stock or any assets. (Instead of creating a separate account, you can transfer these funds to either a goal-saving account or an emergency saving account as per your convenience.)

Also, saving has a lot to do with your financial objective. So, initially, there will be trial and error. You might find a lot of advice on the internet and from people with experience, but not all of it can be practical. So, make sure you analyze your saving strategies.

6. Financial Checkups

 Always remember that you cannot bring a paradigm change in your financial standing overnight. It is a continuous process and takes time and commitment. Sometimes, we set rules, but forget to follow them. So, once in every quarter, analyze how you handled your finances in the past months. While setting up the process, we tend to over-promise and be harsh towards ourselves, but between those drinks and YOLO nights, we forget our goals and objectives. Also, financial planning is a process that might also need to alter as per the situation and change in plan. Thus, constant checkups are necessary so we can align our financial planning with our future goal.

Some myths about Financial Planning

• Financial Planning is only for rich people
• Financial planning is for everybody. It doesn’t matter if you start with Rs.100 or Rs.10,000. We all have financial goals, so we need to proactively plan to manage our money.
• Financial Planning will make me debt-free 
• Being debt-free is not a sign of financial wellness. Yes, we do not want to have liabilities, but if you can outwork those liabilities with strategic planning then those liabilities aren’t that bad. 
• If I am able to manage my expenses and liabilities I am doing my financial planning
• Financial planning is not only about balancing your expenses and liabilities. But it is also about aligning finance with future goals and planning for future uncertainties.
• Wait until a monetary crisis to start with Financial Planning

Start your financial planning as early as possible. You don’t have to earn lakhs to start planning your finances. The earlier you start, the more time you will have in hand to overcome your mistakes.