If we could simply accomplish everything we wanted, at once, with the resources we have, financial planning would be unnecessary. It would simply be a world of instant gratification, as needs were satisfied on demand. Of course, in the real world, we can't simply have anything/everything we want whenever we want.
Resources are limited, and as a result financial planning is essentially about trade-offs. We must prioritize which goals are most important to achieve, and allocate resources to them, recognizing that this means money may not be left to satisfy other goals (or wants or desires). Thus, in practice we might say that the essence of financial planning is to help us prioritize trade-offs, and decide what goals will be satisfied first (and which will be second, and which won't be done until third, etc.).
My Final Four priorities when it comes to personal finance are:
1. Leave within your means and create your Emergency Fund: You only have a limited amount of money, so, to meet your goals you have to reduce expenses and save more.
What this will also do is allow you to create an emergency/contingency fund faster. Typically an emergency fund should take care of 6-8 months of your monthly expenses.
For example if you have invested systematically for a certain goal in the near future and you are in need of funds urgently, you will tend to withdraw from this investment and lose the Power of Compounding on that investment forever.
This wouldn't have been the case if you had a contingency fund in place.
2. Protect yourself with adequate Insurance: Most of us have purchased Insurance as an Investment product, furthermore less than 10% Indians are insured medically. If you have dependents to support financially then you obviously need adequate insurance as insurance and not as an investment. If you can do this, then, what it will ensure is that, you can accommodate the much necessary component of medical insurance into your kitty as well.
3. Minimize Debt: All of us want to live debt free, but that's easier said then done. In this age of plastic money, hard to resist offers and online shopping, credit card debt is one area that we fall prey to very easily. In this over hyped bargain we forget that there is a very high rate of interest charged, for every time we pay only the "minimum amount due". Try and minimize the use of credit card, if possible pay off your dues first and then set a spending limit on your card.
4. Plan for your retirement: The biggest retirement planning failure is failing to plan. When I talk about retirement planning, especially with youngsters who have just started to work, their foremost excuse is " I've just started earning and you want to talk about retirement planning, that is so far off, I'll think about that when I'm around 40".
Simply put, starting early will always help your investments grow with the Power of Compounding.
Resources are limited, and as a result financial planning is essentially about trade-offs. We must prioritize which goals are most important to achieve, and allocate resources to them, recognizing that this means money may not be left to satisfy other goals (or wants or desires). Thus, in practice we might say that the essence of financial planning is to help us prioritize trade-offs, and decide what goals will be satisfied first (and which will be second, and which won't be done until third, etc.).
My Final Four priorities when it comes to personal finance are:
1. Leave within your means and create your Emergency Fund: You only have a limited amount of money, so, to meet your goals you have to reduce expenses and save more.
What this will also do is allow you to create an emergency/contingency fund faster. Typically an emergency fund should take care of 6-8 months of your monthly expenses.
For example if you have invested systematically for a certain goal in the near future and you are in need of funds urgently, you will tend to withdraw from this investment and lose the Power of Compounding on that investment forever.
This wouldn't have been the case if you had a contingency fund in place.
2. Protect yourself with adequate Insurance: Most of us have purchased Insurance as an Investment product, furthermore less than 10% Indians are insured medically. If you have dependents to support financially then you obviously need adequate insurance as insurance and not as an investment. If you can do this, then, what it will ensure is that, you can accommodate the much necessary component of medical insurance into your kitty as well.
3. Minimize Debt: All of us want to live debt free, but that's easier said then done. In this age of plastic money, hard to resist offers and online shopping, credit card debt is one area that we fall prey to very easily. In this over hyped bargain we forget that there is a very high rate of interest charged, for every time we pay only the "minimum amount due". Try and minimize the use of credit card, if possible pay off your dues first and then set a spending limit on your card.
4. Plan for your retirement: The biggest retirement planning failure is failing to plan. When I talk about retirement planning, especially with youngsters who have just started to work, their foremost excuse is " I've just started earning and you want to talk about retirement planning, that is so far off, I'll think about that when I'm around 40".
Simply put, starting early will always help your investments grow with the Power of Compounding.
Conclusion: You can master your financial life by setting your priorities, you could also design your own set of financial priorities, but make sure you stick to them.
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