Steps to build a financial plan
Jan 23, 2019
Ever since you have started working, you have been taking lessons in managing your own money. Personal financial planning is not a rocket science and is a continuous process that starts in a serious manner, probably from your first salary cheque. The seriousness grows, probably when you file the first income tax return. As it is usual, till that time your parents or some of the relatives play a role in fiduciary advisory capacity and you are ok. However, multiple returns, lot of parties / travel, multiple newest / sleekest gadgets and a few mandatory traditional investments later, one day you start wondering, “Hey, it’s time to get serious as I don’t know where is my money going?". It’s usually at this point of time you start doing google searches, speak to a few peers, speak to relatives – who all tell you that it’s time to start a personal financial plan. Here, you start wondering should I do s planning myself (DIY) or hire a qualified financial planner(QFP) ? Also, as this is a data intensive exercise, it is important that you are well-prepared even before you start following the steps as mentioned below (Read Steps to follow even before you start).
Financial planning at a glance : The process of financial planning will encompass the ways and means to meet your basic necessities and dreams / aspiration with a suitable contingency plan.
Basic Necessities :
It is imperative that one thinks of financial planning only after meeting the basic necessities. The first step of building a financial plan is to understand your current status of income and expenditure. It’s all about finding the current method of saving you follow. Is it Income – Expenses = Savings Or Income – Savings = Expenses You can determine your current method using the following steps: 1. Find out your income and expenses for at least last 3 months 2. Please take out all the EMI values that you have been paying and list the assets that you have created with them. Try and put up the market value for these assets. 3. The above analysis and your yearly savings value will give you a clear idea about how are you saving for your future You are probably following the method B, which is mentioned above if If you are not paying more than 30% of your salary as EMIs and your saving is more than 30% of the salary Or You are paying less than 30% of your salary as EMI and your saving is more than 40% of your salary If you happen to follow method A above, then you need to re-prioritize and analyze your expenditure and seriously think about cost curtailment. The value of savings determined in this step, will create the base for creating your financial plan.
Dreams and Aspirations:
A financial plan is your vision document to achieve your life’s aspirations. At the time of creating the financial plan, one tries to create a roadmap in achieving one’s dreams through existing savings and earnings. The dreams and aspirations for an individual must be listed with a clearly articulated financial values attached to them. This is possible through following action plan:
?Step 1 – List your dreams
?Step 2 – From these dreams, set your goals. Dreams with timelines are goals. Examples
?Step 3 – Segregate your goals in to long term, medium term and short term goals and negotiable / non-negotiable as below
?Step 4 – For each of the goal, determine the financial value desired considering inflation use calculators for each of the goals)
?Step 5 – Based on the same, find out the targeted value of saving (Calculators)
?Step 6 – Adjust for the current level of savings and decide your investment plan
A financial plan must always provide for 3 important contingencies as mentioned below ? Living too short – Sudden and unexpected demise of the earning member, can put the family in deep trouble – Know your Human Life Value and risk mitigation plans for tackling this risk
? Living too long – Retirement planning is a must in these days. You can understand more above retirement planning by putting a value to your pension requirements. To know more, click here Coming Soon
? Living with morbidity – Health expenses must be provided for in a sound financial plan. To know your health care requirements click here and know more. An expenditure to the tune of 1-5% of your current annual salary is desirable for contingency planning. It’s the most important aspect of financial planning.
Once the above base-work is done, the following steps actually help one to build a detailed and executable financial plan
Know your current situation
Your current income, expenditure, life stage and risk appetite will help you to understand the proposed savings for meeting your financial aspirations. To know more, click here Coming Soon
Know your goals & investment option
List down the investment avenues available against each of the goals. To know more, click here Coming Soon Systematically research them to know their risk-return profile and suitability to your goals. Eliminate those options that don’t suit your goals. Note down each of the goal and savings desired against them.
Make a choice
Compare each of the investment options available for each of the goals on the basis of To know more, click here Coming Soon Safety Liquidity Return Tax savings Ability to beat inflation Check out for the past performance of the instruments and determine the instrument choice. Marry goals to options and diversify. Seek an expert investment manager’s opinion if need be (Read – how to choose an investment manager). Create monthly, quarterly and annual investment plans for each of the goals basis this.
Implement the plan
Implement your plans by investing directly or through an intermediary To know more, click here Coming Soon
Review the plan
Set a review mechanism To know more, click here Coming Soon