Basic Financial Planning Tips for Beginners 2023

Basic Financial Planning Tips for Beginners

Financial planning is one of the major aspects associated with the life of every individual. Yet it is very strange to know that many of us hardly put much emphasis on making a financial plan. We rather believe that saving money is a much easier and hassle-free option. The statement is not completely wrong, however in today’s world making basic financial planning is very much necessary. It helps in structuring a framework for achieving various financial goals associated with the life of individuals.

Always note that there are tons of wealth-creation opportunities available in the market. These are very easy to execute and provide a definite return if all the steps are executed properly. In today’s blog, we will read and learn about how one can make basic financial planning for self.

Qualities of a Good Basic Financial Planning

The basic mantra while making a financial plan must be that it should be simple and easy to execute. The portfolio could be diversified however it is very important that the chosen financial instrument must be easy to buy. Also, it is highly advisable that a financial plan must have limited financial instruments. This helps in better tracking and management of the portfolio making it easy and convenient at the same time.

Avoid investing in any such financial instrument which is very complex to buy/understand or involves a lot of paperwork. Remember the statement that “A good financial plan is one which is simple, easy to execute and effective”.

A good financial plan consists of an adequate balance between tax savings, returns on investments, and insurance coverage. This balance is very important as it will serve the right purpose of creating a financial plan.

Let’s understand this with an example.

If an individual invests only in equity, then he will face a lot of challenges if the market crashes and at the same time there is a medical emergency and there is no medical cover. Similarly, if you are earning a lot of money but there is no proper tax planning then you will end up paying a lot of taxes unnecessarily.

Hence a balance between all these instruments is the key to a good financial plan.

Since we understand what a basic financial plan must look like. Now, let’s understand how one can allocate his monthly salary in such a way that it meets all the above requirements. This will in turn help the individual in making a balanced and more effective financial plan.

How to allocate your monthly salary (Funds Allocation)?

The best qualities of a successful financial plan are the allocation of resources. Doesn’t matter how educated you are. If you fail to allocate your funds properly, you will end up making an unbalanced financial plan. This is certainly not what we want hence we must understand how to allocate our funds properly. This will help us in making a good and effective financial plan.

Always remember a basic thumb rule that a maximum of 50% of your salary can be utilized to take care of all the household expenses which are fixed in nature. Further, one must save at least 20% of their salary for the purpose of investment in various investment tools. The higher, the better. And finally, the remaining funds can be used by an individual for personal development or leisure expenses. We will understand this more easily with the help of the below example.

Imagine that your monthly salary is INR 30,000. If you plan to allocate your funds as per the above plan then it will look something like the below table.

ParticularsFunds Allocation (In %age)Amount
Household expenses (Fixed)50%15000
Personal development /Leisure expenses30%9000
To be invested20%6000
Funds allocation if the salary is INR 30,000 per month

Since then we understood how to allocate our salary for various expenses and investments. Let us now understand the steps which an individual can follow to make a personalized financial plan for themselves. This will be both easy and effective.

Steps to be Considered While Making a Financial Plans

Maintaining an Adequate Savings Account Balance

This is the first and most important step toward making an effective financial plan. Saving is one of the most preferred and liquid assets readily available for any individual. One can save money easily by registering for a bank account with any of the available banks and depositing their money as per convenience. This is the easiest and most preferred option among individuals to keep their surplus funds safe. However, it is always a topic of debate as to how much funds should one keep in their savings bank account.

Always remember a golden rule that your saving account must maintain a balance of at least 6 times your fixed monthly expenses. This is necessary to anticipate the fact that if in case you don’t have a job due to any unforeseen events. These surplus funds will be available to support your fixed expenses till you sort out other income options or an alternate job.

Further, you can always get a higher rate of return even on your savings account balance by opting for the right savings bank account. We will learn about how to choose the best savings account to earn the maximum rate of interest later.

Paying Off Bad Loans

This is considered one of the biggest roadblocks while creating a successful financial plan. It is highly recommended that one should consider repaying all their bad loans on priority. Bad loans are all those loans on which an individual is paying more than 9%+ interest. Such loans are Persona loans, Car Loans, Interest payable on credit card EMI, etc. Instead of investing money in mutual funds, one must consider paying bad loans on priority to set off their major liabilities. Further, investment opportunities can be explored once all these bad loans are settled.

Additional Recommendation on Paying Off Loans

Now, we have seen that most of the time it is recommended that one should consider paying off their home loan as well on priority to become debt-free. However, this is just a pure myth. The interest payable on a home loan is merely 6%-7% which is very less as compared to other bad loans. Also, there are many tax benefits available to those individuals who are buying their first home. It makes a home loan a good loan option. Also, Inflation, in the long run, will automatically settle the amount paid in the form of interest by increasing the value of the house purchased making it almost interest-free.

One should consider investing in a long-term mutual fund to set off the interest they are paying on the home loan amount. If you keep investing a fixed amount of money in mutual funds for an equal period to which your home loan is active. it will eventually end up generating a very good return on your investment. And this will eventually result in an interest-free home loan.

Either way, you can consider it as a mutual fund in which you invested for a long time and generated good returns on it. Or you invested in the same fund to anticipate the interest amount which you are paying on your home loan.
This surely works. Give it a try and calculate yourself.

Insurance is Important

In order to live a peaceful and stress-free life, one must consider buying/investing in insurance. The two important insurance which should be considered is life insurance and health insurance. It is an irony that people consider taking insurance for their electronic gadgets or motor vehicles. However, when it comes to life insurance/Health insurance many people are either unaware or believe that it is not irrelevant. We shall learn about both of these insurances in the below table.

Life InsuranceHealth Insurance
It is a contract between a policyholder and an insurance company where the insurer promises to pay a sum of money in exchange for a premium, upon the death of an insured person or after a set periodIt is a contract between a policyholder and an insurance company where the insurer promises to pay a sum of money in exchange for a premium, in case of medical exigencies at any point time during the policy cover
It is highly advisable to buy a life insurance coverage if you are an earning member of the family and have dependentsIt is highly advisable to buy health insurance for all the individuals in the family.
This will help the dependents/family of the insured person in case of any mishappening by providing them with the much-required financial aid In case of any medical exigency, health insurance will provide much required financial aid against the medical expenses up till the covered amount
A life cover must be equal to 20 times the annual income of an individual.Health insurance must provide a cover of at least INR 1-3 lakhs per annum per member of the family (Can opt for critical illness cover if needed)
It is highly advisable to buy life insurance at an early stage of life (Preferably 20s) since the premium amount will be very less and will remain the same throughout the policy periodIt is highly advisable to buy health insurance at an early stage since the premium amount will be very less and will remain the same throughout the policy period
Even if you are covered under an office life insurance policy. Always consider buying a personal life insurance plan since the office cover will lapse as and when you will leave the designated firm and later you will have to pay a higher premium amount for acquiring a LIP. Even if you are covered under an office health insurance policy. Always consider buying a personal health insurance plan for yourself and the family since the office cover will lapse as and when you will leave the designated firm and later you will have to pay a higher premium amount for acquiring health insurance.
This will cost around INR 6k to 7K per annum if an individual is 20-30 years old and not a smoker. — It is a contract between a policyholder and the insurance company where the insurer promises to pay a sum of money in exchange for a premium, in case of medical exigencies at any point time during the policy cover This will roughly cost INR 1K for 1 lakh worth of cover for each member separately (5k to 10K per annum for a family of 5 members for 1-2 lakh worth of cover for everyone)
Table Summary

Just think, how easily you have completed your basic emergency financial planning only by investing roughly INR 1000-2000 per month in the two most important and valuable assets. Also, because of the fact that the future is uncertain, Insurance planning is a must for everyone. And It is highly recommended to be considered on top priority by everyone. Finally, consider investing only in a maximum of 1-2 of such policies. Anything more than this is a waste of money and effort. We will learn more about how to choose the best insurance policy at a later stage.

Retirement Planning

NPS (National pension system) is a voluntary defined contribution pension system in India. It is just like PPF or EPF. However, NPS is considered a better option since it gives a higher rate of return (9%-12%) as compared to other retirement investment instruments. One can invest any amount of money in NPS every year up till the age of 60 years. Later at the time of retirement, 60% consolidated amount is given to the investor in a lump sum. And remaining funds are converted into an annuity plan (Monthly income plan) for dealing with monthly expenses.

The best part about NPS is that it provides tax-saving benefits to investors. If one invests up to INR 50K per annum. Also, the lock-in period here Is rigid which is usually considered a drawback but since this is a retirement planning instrument, the lock-in period will help in growing the money at a constant speed in a disciplined manner.

So, if you are someone who is looking to make their retirement life happy, consider investing in NPS every year and let the compounding do its magic. You can always refer to an online calculator for forecasting your share of investment and the estimated returns post the maturity period.

Tax Saving Mutual Funds

Tax saving has always been one of the biggest headaches for many taxpayers. For such people, ELSS mutual funds are a saviour. Consider investing in ELSS mutual funds since it provided tax-saving benefits under section 80C.
The best part about ELSS mutual funds is that you don’t have to compromise on the rate of return. Keep the money invested for the lock-in period of 3 years and let the compounding do its magic.

Also, it is to be noted that tax saving provided under section 80C is up to INR 1,50,000 hence ELSS mutual fund must be bought only after considering the value of insurance, NPS, and other investment instruments since buying more than the tax exemption limit will not result in any additional benefits. Rather it would be better to invest in a normal mutual fund with excess funds. We will learn more about how to choose the best mutual fund at a later stage.

Other Investment Instruments

Once you have taken care of all the above-mentioned steps. The next step which you need to consider while making a financial plan is choosing the right investment instruments. There are various investment tools available in the market like Stock, Mutual Funds, Gold, Real estate, etc. One can choose between any of the mentioned options to invest their money. Also one can even diversify their portfolio by investing in multiple options.

Investment planning is also one of the major aspects of creating successful financial planning. This will lead to wealth creation at a very good rate. One can take the help of a professional financial planner to make a personalized investment plan for self. The risk profiling is done on an individual basis and further various investment instruments are recommended by the professionals. You may or may not consult the financial expert basis your own requirements.

Now, if you are someone who is willing to invest their money in the market themselves then you consider the below recommendations too.

Where to Invest Money to Get Good Returns?

Table 2.1- Where to invest money to get good Return


If you are a young individual and willing to invest your money for the purpose of good returns, then the stock market is the best option. You will gain a lot of knowledge and exposure. One can learn how to invest in the stock market easily by following various YouTubers and blogs. (We are going to write a separate blog on how to invest in the stock market for beginners very soon so stay tuned and keep following).

Further, you may consider investing at least 20% of your share of the investment amount. We will follow the same example used above. If your salary is INR 30,000 and your “to be invested” amount is 6000 then you can consider investing 20% of the same into stocks. Refer to table 2.1 for a better understanding.

Mutual Funds

Mutual funds is the most preferred investment option available in the market. Here an individual can choose amongst large-cap, mid-cap, and small-cap funds as per their preference. The best part about mutual funds is that they are managed by professional investors and allocated into various sectors making them less volatile as compared to stocks.

One can start investing in mutual funds easily by opting for any of the available investment apps or websites available in the market. Invest your money in a long-term SIP and let the compounding do its magic. Mere investing INR 5,000 per month for 10 years @12% return will get converted into INR 11,61,695. That’s how powerful compounding is.

Consider investing in mutual funds at an early stage and enjoy the benefits later.

Sovereign Gold bond

Gold is considered one of the favourite investment options for various Indian people. However, this is to be noted that investing in physical gold is not always a good option. So many complications associated with buying physical gold like making charges, melting charges, etc. make it a complex and sometimes less effective investment.

Now, if you are willing to invest your money in gold and want to see it grow at a good rate. Always consider investing in sovereign gold bonds. It will give you an average return of 10%-12% annually. In addition to the regular investment, it also gives a fixed return @2.5% to its investors.

Just imagine how easy it is to invest in a gold bond without losing any of your hard earned money and getting a better rate of return. Surely worth investing in.

Other Instruments

If you have considered investing in the above options and yet are left with additional funds then you can consider investing in other instruments like cryptocurrency. It is considered one of the highly volatile options. Yet it is believed that those who stay in this market for the long term will always earn good returns.

Similarly, you can consider investing in various other investment tools available in the market however beware of the bad investment tools.
If you are willing to invest in cryptocurrency then consider reading our previous blog about the best platforms to buy cryptocurrency in India.

Conclusion- Basic Financial Planning Ways for Beginners

We have read and understood all the various aspects associated with financial planning. It is always said that investing is a skill that can be learned easily. By following the above steps, you can easily create a basic financial plan for yourself and your family members. This will surely help you in maintaining all the important aspects related to your life and will also help in creating wealth in long run. Start early and enjoy the benefits of financial planning and investment.

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