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Level | Intermediate
What is financial planning and how can ou start?

You might have a few goals set out for the years ahead. Financial planning is the process by which you can identify, prioritize and plan to achieve your financial goals by saving and investing your money wisely. To draft a simple financial plan, you can follow these general steps:

  • Set your goals and categorize them: It begins with you thinking of your financial goals, and then categorizing your goals as short, medium and long term goals, set a target date and a priority level for each. While it is difficult to predict perfectly what each individual’s priorities might be, you can consider the following examples for guidance:
Goal categorization Goals Years to achieve the goals Priority
Short term Car 1  
Medium term House 7 Yes
Long term Child’s education fund 15 Yes
Long term Retirement 30  

Then, understand and calculate the financial cost of achieving these goals.

Goal categorization Goals Specific Goals Years to achieve the goals Priority Cost of goal today
Short term Car 5 Seater SUV 1   7 lakh
Medium term House 3 BHK 7 Yes 60 lakh
Long term Child’s education fund College abroad 15 Yes 25 lakh
Long term Retirement Happy retirement 30   1 Crore
  • Organize your financial records: File and categorize your financial records and stick to this routine. Make sure that you are keeping track of all of your spending, your income and any bank accounts or other savings or investments that you may have. For example, rent, food and bills (electricity, phone, petrol, etc) goes into the expenses file, investments in another and so on.

  • Note down incomes and expenses: It is best to organize these into monthly income and expenses so that you can calculate your finances on a monthly, then on an annual basis. If you can, use a columns-based document or spreadsheet. You can start by simply listing down all of your expenses in one column and all of your incomes in another column. Calculate the two totals. This sheet is what can be called your financial balance sheet status.

  • Cut down on unnecessary or high expenses: Identify unnecessary monthly expenses, so that you can think of redirecting that money towards accomplishing your goals. The more money you can redirect towards planning for your goals, the sooner you shall accomplish them. Money experts suggest that just writing down these costs can encourage you to reduce spending, as it makes you aware of everything you’re doing with your money.

  • Check your financial status: After all the budgeting, is the money remaining in the income column enough to start investing towards each of these goals? Getting to know your financial status and goals will possibly bring up unexpected information – you may have more money than you thought, or you may have gaps in your knowledge. Do you know how much a college education costs today and might cost 15 years from now, and will your child even go to the university you’re thinking about? Will the changes in your income match those goals as you come close to reaching them? Would you be able to cope with any emergency expenses? Looking ahead will help you plan and invest better.

  • Rethink your goals: Once you have an estimate of your expected cash flows for the coming years, realign your goals considering your priorities, as well as factors such as inflation, which will make these goals more expensive in the future. Going back to the example we had seen earlier:

Goal categorization Goals Specific Goals Years to achieve the goals Cost of goal today Cost of goal keeping inflation into consideration (6%)
Short term Car 5 Seater SUV 1 7 lakh  7.4 lakh
Medium term House 3 BHK 7 60 lakh  90.2 lakh
Long term Child’s education fund College abroad 15 25 lakh  59.9 lakh
Long term Retirement Happy retirement 30 1 Crore  5.7 crore
  • Conduct your research: Gather all the details of your financial status, and study the various investment options that are available.

  • Create a financial plan: Once you have a preliminary plan ready, then to be doubly sure, contact an investment advisor and discuss your plan with him in detail. The professional advice he gives you may be invaluable in sharpening your strategy and will also give you the confidence that you’re on the right path.

  • Stick to your plan. Once you start on the journey, try to stay disciplined and keep track of your financial status, your budget, any changes in income and the timeline for your financial goals.

  • Remain flexible: While sticking to the plan is important, it is also necessary to be flexible towards market movements, income changes, new opportunities available to invest in, or even life changes, etc. You should then alter your plan to a more realistic one.

Implement your financial plan at the earliest and don’t forget to track your progress regularly or on an ongoing basis. You can also use your financial plan as a place to note down all of your investments and the goals that you hope each will fulfill, and chart your progress. Remember - this is your financial health passbook. Keep updating regularly.

When you have been through these steps, you have reached the point at which a professional investment advisor will be the most useful. Be realistic with him about the amount of time that you would like to spend on a monthly basis managing your money. Ideally, you should be able to build the plan, start putting money into investments and then review once every quarter.

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Key Takeaways

1.To create your financial plan, you must gather all available data on your expenses, assets, liabilities and financial goals.
2.Ensure that you are not under-budgeting for your goals.
3.Be realistic about market movements, future changes to income, new investment opportunities available and life events.
4.Seek advice from an investment advisor.