The year 2020 has been the most unexpected year for the majority of us. The Covid-19 Pandemic and all the lockdowns that ensued to control the spread of the deadly virus has affected every country’s economy, that too, not in a good way.
The pandemic forced several businesses to shut down, resulting in many people losing their jobs, hence their source of income and financial security. Therefore, we must understand the importance of personal financial planning and do it wisely in 2021.
Before we begin to talk about financial planning, it’s essential to understand that everyone has a different way of planning their Finance. No one method would suit everyone. This is simply because everyone has another goal that keeps changing as per their circumstances.
Imagine that there are five different people: ay student has to pay their student debt, a person who wants to grow their business, a person who wants to expand their family, a person who has to pay a considerable amount of medical debt, and a person who is recovering from a substantial financial loss.
All of these people would have a different way of planning their finances. For instance, the person recovering from financial loss and a student paying off its debt would focus on saving and clearing their debt. In contrast, others would look up at different forms of investments.
There are multiple ways through which people can plan, save, and invest in their finances. However, one thing would remain common in their whole personal financing planning process: setting their short-term and long-term goals and planning how they can achieve them.
Let us now understand what exactly personal financial planning means and the various steps involved in it that would help you succeed financially plan the year 2021.
What is Personal Financial Planning?
Personal financial planning refers to the complete process through which you can calculate, strategize, manage, save, and invest your personal finances in a way that would provide you with financial stability and growth.
It refers to the process and the journey through which you’d be able to meet your financial goals. Since everyone has different income, goals, strategies, and needs, and priorities, they also tend to have other financial plans at a personal level as well.
Financial planning at a personal level is influenced by everything that you have and everything that you owe to someone. It takes proper account of your income, expenditure, savings, debts, investments, and necessities, along with your dreams and goals.
Therefore, to have a secure financial future, you should start planning your finances immediately with the help of an expat financial advisor such as expat financial advisor Adam Fayed who can guide you with his expertise in the field of finances.
Besides taking help from financial advisors, you should read further to know about the typical personal financial planning steps.
Significant Steps Involved in Personal Financial Planning
The whole process of financial planning is not a two-step process. It involves multiple steps, and it’s not essential for everyone to go through the same set of steps or follow them in a particular order.
However, the following are the four basic steps that would make your financial planning base, irrespective of your financial circumstances and facilities.
Calculate Your Current Finances
Before you start planning about the future, you must be aware of your current situation. Therefore, you should first calculate and analyze your finances with the help of various financial statements available in the form of balance sheets and income statements.
Create Your Financial Goals
The immediate next step after calculating your finances is not to start investing. Instead, it’s creating some short-term and long-term financial goals that you aim to achieve. This is the most crucial step in any planning process as the goals developed by you act like stepping stones for you.
You should set some feasible financial goals that you know you can achieve with proper planning. Avoid setting goals that are simply not possible to achieve practically as not being able to achieve your goal might demotivate you and create hindrance in your other goals, especially long-term goals.
Setting goals always makes things more manageable, and it’s suggested to set shorter goals that can be achieved quickly. This is because completing your short-term goals would motivate you, and you’ll feel more than ready to fulfill your second goal.
Creation And Execution Of The Financial Plan
Once you’ve set your goals, it’s time to create a roadmap or plan that would help you achieve those goals. It’s suggested that you should make the financial plan in consultation with your Financial Advisor.
The Financial Advisor being experts in the field of Finance will be able to provide and suggest to you the appropriate financial strategies as per your current situation and future goals. They would be able to align your goals with the proper method.
Once you’ve created a plan, you should execute it and stick to it. You shouldn’t be irregular in its implementation, except in case of emergency, which would be taken care of in your financial strategy if a professional Financial Advisor prepares it.
Monitor The Plan And Re-define Your Goals
The last step of the personal financial planning process includes constantly analyzing if the plan you chalked out and executed is working for you or not. This can be done by checking if you’re able to achieve your short-term goals or not.
Since the short-term and long-term goals decided by you will be interconnected, achieving the short-term goals would imply that the financial plan and strategies are working in your favor.
However, if you’re not able to complete your goals, you should either opt for a new financial strategy or lower your goals.
Now that you know the significant steps involved in personal financial planning, let us look at the various factors that have resulted in people altering their financial planning process in 2021. Afterward, we’ll dive into the different personal financial strategies that would help you meet your financial goals.
Factors That Have Impacted Personal Financial Planning in 2021
Various factors have seriously impacted everyone’s financial planning in 2021. The primary reason behind them is the Covid-19 pandemic and all the problems created because of it.
Out of all the factors, people realizing the importance of financial and health security have been driving most of the whole personal financial planning process for people.
The pandemic resulted in many people losing their family members due to lack of income, financial cover, health insurance, and proper medical care. Most importantly, businesses shutting down due to the lockdowns made to prevent the spread of the virus.
People who had a financial safety net in some form of savings and insurances were able to get through the lockdowns somehow despite facing heavy loss. However, people who hadn’t done even the basics of personal financial planning had to see a more significant loss.
Apart from the business and economic factors, personal financial planning is influenced by our personal lives. For instance, a person decides to start college and has taken debt taken for it. A person who entered or got out of a legally certified relationship will also face some considerable changes in their financial planning.
Before making and facing some of these significant changes during a pandemic, it’s crucial to understand how these actions would impact your financial assets and planning. Therefore, it’s suggested that you should financially plan your upcoming months and years in advance so that you don’t have to go through the phase of financial insecurity.
Now that you’re aware of some of the various reasons that have impacted the ways through which people would plan their finances, you should read further to know the multiple ways through which you can plan your financial year 2021 differently and more effectively.
Different Ways Through Which You Can Financially Plan 2021
The Personal Financial Planning process’s main steps include assessing your current situation, setting goals, and creating, executing, and monitoring your financial plan strategies.
Out of these, setting your short-term and long-term goals is the most crucial step as it would give you clarity and a heads-up in regard to what measure you should make next. So, once you’ve set your goals, it’s time to work on them by executing the financial strategy.
The following are some of the different and best personal financial strategies that’ll surely help you in keeping up with your financial goals.
Budget: Keep A Check On Your Spending
The most crucial part of any financial process is calculating what you have and then spending it further in a wise manner. In order to differentiate between how much spending is genuinely required and how much expenditure comes under ‘extra,’ you should make a budget.
You can make a monthly budget and divide your expenses in the following manner:
- 50% for essential services like housing rent, food, education fees, and transportation
- 30% for secondary services like shopping, dining out, and all the extra expenditure
- 20% for clearing your debt and saving the rest for the future in the form of an emergency fund
Dividing your expenses will help you control the amount that you’ll spend. It’ll prevent you from overspending as you realize that you have to stick to a budget. Moreover, as you spend money, keep on noting it down in a separate budget diary and reflect on it at the end of the month.
In addition to it, if you’re not comfortable making a monthly budget, you can make a weekly budget. The weekly budget will help you in finding your financial spending pattern. After looking at it, you’ll be able to figure out the areas where you’re unnecessarily spending the most.
Also, there are multiple ways to make a budget. You don’t need to make it on your own with the help of a pen and paper. You can install various budgeting applications such as Pocket Guard, Mint, and Goodbuget on your phone, which would help you keep a tab on your expenses.
Limit and Clear Your Debt
First and foremost, you should keep a particular percentage or amount of your income separately for clearing your debt. This step is most crucial for people or students who are constantly worrying about whether or not they’ll be able to pay off their debt with minimum interest.
One of the best ways to limit your debt is by making a budget and not spending more than what you’re earning. In addition to it, if you’re already in debt, such as in the form of a student loan, then you should avoid taking aby additional loan as it would just increase your burden.
However, in some exceptional cases, like when it comes to housing and rent, taking an additional debt can be advantageous. For example, in many cases, renting a house is more economically beneficial as compared to taking a mortgage to buy it.
This leasing method is most useful for someone who wants to invest more in their business and is willing to take the risk.
In addition to it, if you’re someone who is in debt, you should try to clear your debt with the highest interest rates first. This would prevent an already high rate of interest from getting higher and increasing your debt.
You can’t successfully plan your personal finances without doing some savings. You should avoid making any extra expenditure even if you’ve additional money. You can either invest that money or save it for the future.
Saving is significant for people who are already in debt or looking for an additional income source. Impulsively purchasing something can create obstacles in your financial plan as it might asl you to take money out of your emergency fund over a product that is not required.
Therefore, you should try and aim for zero cost with the help of ‘buy now, pay later options provided by various products. It’ll help you incorporate an expensive product in your budget and financial plan as you won’t need to spend a considerable sum of money in a single go.
Another way of saving is by planning your actions rather than acting on them impulsively. For example, if you have some travel plans in the near future, you should plan your trip in advance and make a separate budget for the whole trip, rather than including it in a single month’s budget.
Create An Emergency Fund
As discussed above, it’s essential to create an emergency fund, especially with a pandemic around. Ideally, an emergency fund would include approximately 20% of your income. However, even after you have achieved your goal of the emergency fund value, you should continue investing in it.
This is because of a simple reason that emergencies are unexpected. The most recent example being the pandemic, the most unexpected time in our lives, and having some savings or an emergency fund with you would make things a lot easier.
For example, if there is any medical emergency or you have to pay off the debt immediately, you can simply take out some amount from your emergency fund. Doing so would not hamper your short-term and long-term financial goals and planning.
Invest Your Money
After going through all the steps mentioned above, it’s important to remember for whom you’re saving all of your money. In terms of planning, you’re keeping all this for yourself and your future self.
Investing in any reliable scheme and stocks or getting insurance are some of the best ways through which you can secure your money. Investing in stocks would help you in exploring different investment options as well.
Moreover, you should definitely get health insurance as soon as possible. It would save you from the wrath of substantial medical bills in the time of an unfortunate emergency.
However, it’s not vital for you to follow all the steps and that too in any particular order. Some strategies might not suit you in the long run despite you being inclined towards it. Therefore, the best option apart from them is going to a financial advisor.
A financial planner refers to an individual who has professional knowledge in Finance and can help you achieve your short-term and long-term financial goals. They’re able to do so by having a conversation with you, looking at your finances, and analyzing your goals along with the amount of risk that is necessary and you’re willing to take.
Once they’ve analyzed your risks and help you set some financial targets, they’ll provide you with some financial strategies that you can use to reach your goals quickly. Moreover, they’ll stay in constant touch with you, and you could always ask them for suggestions regarding any financial investment or strategy and clear your doubts. An expat financial advisor is a person who specializes in giving financial advice to expats, or, people that spend the majority of their time living in a foreign country.
Some of the prominent expat financial planners include expat financial advisor – Adam Fayed, and HSBC.
Financial planning has become a crucial part of everyone’s life since the Covid-19 Pandemic because of all the hardships that had to be faced by people. Therefore, you should start planning and taking care of your finances by following the various strategies mentioned above.
Among the various strategies, it’s suggested that you constantly monitor your credit score and visit financial advising sites and financial advisors to seek guidance.