Personal Financial Planning: How to Make One and Its Benefits

How do you create a personal financial plan, and what are its benefits? Good financial planning is needed to keep your financial condition healthy. Unfortunately, not everyone knows the right way to plan their personal finances.

It is therefore no surprise that many people still complain about the hard situation at the end of every month before payday. If you can plan your personal finances, you won't need to go through that.

Actually, planning personal finances is easy. Here are some common steps you can use as a guide, namely:

1. Preparing an Expense Budget

Calculate precisely the amount of income you receive each month, for example a fixed salary. If you have other sources of income that are not fixed, these can be included in the other income category.

This calculation should be done before receiving your monthly salary or spending it. Calculating before the month changes gives you plenty of time to complete your personal financial planning.

2. Recording All Personal Income and Expenses

Without personal financial records, you cannot manage your personal finances well. Recording all income and expenses will help you manage your money. You can see what your income is used for, and find out what can be cut or increased to meet your needs.

These records will also help you in preparing your financial plan. For example, if you plan to buy a private vehicle, you need to start saving from now on. This plan can also be used to estimate the savings you can accumulate within a set timeframe.

3. Applying the 50/30/20 Rule

The 50/30/20 rule was introduced by Elizabeth Warren. In your personal financial planning, you can apply this rule to divide your net income into 3 portions. How does this rule work?

First, 50 refers to 50% of income set aside for daily needs and mandatory bills. Calculate all your daily needs and the costs you must pay each month, from food shopping, toiletries, electricity bills, and others. Check whether the amount is exactly 50% of your income or more. If it is more, you can work around it by buying cheaper daily necessities or hunting for discounts.

Set aside 30% of your income for wants and entertainment. This matters so that you can have things that bring you joy while still managing your personal finances. Such entertainment is also considered necessary as a reward for yourself. You can set aside income for the entertainment you want.

In preparing your financial plan, the remaining 20% should ideally be used for savings and investment. You can also consider setting up a retirement fund for the future.

4. Avoid a Consumptive Spending Culture

Avoid consumptive spending because this culture will only throw your financial planning into disarray and eventually leave you with no money. Make sure you only buy things you truly need at a reasonable price.

5. Pay Debts and Installments on Time

Having no debt will make you live more comfortably. This is also better for your personal financial condition. You will have no burden other than daily expenses. Therefore, avoid debt as much as possible.

If you have already taken on debt, make sure to pay it on time. This is especially important if you borrowed from an institution that sets loan interest and late-payment penalties. Pay on time so you can clear the debt quickly and have more freedom to plan your finances.

6. Allocating an Emergency Fund

Following up on point 3 above, part of the 20% of your income can also be allocated to an emergency fund or adjusted to your financial condition.

An emergency fund is important so that if something unexpected happens, your financial condition is not disrupted. In this regard, it should be understood that an emergency fund and savings are different.

Benefits of Personal Financial Planning

Earlier, general ways of preparing a personal financial plan were presented. Why should you make a financial plan? What are the advantages?

For some people, preparing a financial plan is considered quite troublesome. It is therefore no surprise that the excuse of laziness is often used. Yet if you succeed in preparing your personal financial plan regularly each month, many benefits can be gained, including:

1. Becoming More Organized and Disciplined

Being able to manage personal finances shows that you can distinguish between what is a need and what is a want. You will also become more orderly each time you make a purchase. Gradually but surely, consumptive habits will decrease and life becomes more frugal.

You will also be more disciplined because everything has been arranged in detail. This covers not only basic needs but other needs as well.

2. Having a Future Plan

Personal financial planning includes plans for the future. When planning is orderly and neat, you need not worry about the future. If you want a comfortable old age without debt, you can consider investing now.

You need to plan this well and consistently so that results become visible. For example, if you plan to get married and own a house, make sure you can arrange those plans.

3. Having Protection Against Unexpected Events

No one can know what will happen later. Therefore, preparing a personal financial plan is useful in providing protection against unexpected and uncertain events.

The habit of planning makes you think more critically and choose carefully how to protect yourself. Commonly chosen forms of protection include insurance and investment.

4. Being Free from Debt

A consumptive culture will only tempt you to keep shopping and shopping. Yet the things you buy are not necessarily needed. This not only worsens your financial condition but can also lead to hardship if you become trapped in debt.

This is where the benefit of financial planning itself becomes very noticeable. Having a financial plan will make you allocate your income as well as possible and spend it more wisely, so you can be free from debt.

5. Clearer Life and Financial Goals

Everyone has different life goals. Some aim to get married, buy a house, buy a vehicle, start a business, or others. By creating a personal financial plan, you will be more discerning and better prepared to take steps toward achieving your goals.

6. Avoiding Stress

Most people with financial problems feel pressure that affects their mental health. Stress often arises and can invite many illnesses.

With a good personal financial plan, you will avoid debt, financial problems, and hedonistic lifestyles. This certainly helps keep you away from stress. In short, managing your finances will make you more comfortable and at ease.

That was a summary of how to make a personal financial plan and its benefits. For those who have never made a financial plan, it may indeed feel difficult at first. Laziness often creeps in as well. Therefore, determination and awareness that this is good for your financial condition are needed, so that it can become a habit.