Steps to create a successful long term Financial Plan

How many of us really take Financial Planning seriously? Do we provide enough time and efforts to plan our investments? Or else at the end of the financial year for tax purposes we do investments in hurry? How do we plan our Investments?

Most generic way is :
1. We start investing in something just because our friend or next door neighbor has got double digit returns in a month (WHAT).

2. Rarely do we have a systematic way or detailed plan of structuring our investments (HOW),

3. And even rarer is our definition of an end goal (WHY).

This way of investing is getting us NOWHERE as it lacks vision and direction. We need to think over it and try to find out answers of WHAT, HOW and WHY. So its very important that we follow the proper Financial plan so that we can answer all the above Questions.

What is Financial Plan?

Financial Plan is a road map created by the financial expert for the client or the DIY investor himself/herself on which he/she intends to walk on to achieve financial freedom.

What is depicted in a Financial Plan?

Financial plan mainly gives us the answers of three questions

Why to invest?- Identifying the goals

Where to invest?- Identifying the best financial instruments

How much to invest? – Monthly amount required to be invested.

Steps to be taken to create successful Financial Plan..

List out all your income sources: Apart from your salary and business income list the other sources of income too i.e rental income, dividends, interest income, annual bonus and agriculture income etc.

Pen down all your monthly expenses: It includes all your monthly household and personal expenses. It also includes your monthly apportioned part of annual expenses.

List down all your assets and liabilities: Identify all your assets whether liquid(equity and debt both) or fixed assets. Write down their current value. Same process do it for your liabilities. Write down the current outstanding balance of different types of loans you have.

Identify your life goals: This is the most important activity for the successful Financial Plan. You should know the goals for which you want to invest. You should know the time horizon of each and every goal and corpus required after discounting Inflation.

List down your existing life insurance and Health insurance policies- This step helps us to know whether we are adequately insured or under insured. To know whether we have purchased so many traditional life insurance policies just for tax purpose. It helps to know whether we have our own health plan apart from employer health plan.

Risk profiling: It is one of the foundation steps of successful financial plan. Before starting investing always do your risk profiling. It is a process by which you understand what type of investor are you whether conservative, moderate or high-risk taker. It helps you to chose proper financial products according to your risk appetite.

Once you list down or gather all above information now next process start

Prepare Cash flow statement: Cash flow statement helps us to know our monthly investible surplus (monthly saving) by deducting all monthly expenses, EMIs and your monthly apportioned part of annual expenses, life insurance and health insurance premiums from your total monthly income.

Prepare your Net Worth Statement: Net worth is the report of your Financial Health. In simple terms Net worth is your Worth. It is calculated as Assets you own – Liabilities you have. Net Worth: Your Financial Health Meter

Prepare Financial Asset Allocation Chart: Asset Allocation is representation of your investments in different classes of financial instruments (e.g. land, gold, equity, debt, real estate as well as cash in hand etc) in proportion of your total assets. It helps you to know in which asset class you are invested more and whether actual asset allocation is aligned with required asset allocation proportion.

List down current available resources to achieve financial goals: It includes your monthly savings, current equity investment and debt investment.

Now your each goal planning starts. But before that

Set your emergency goal.: Emergency Fund is a kitty which is been kept aside to face any unforeseen event in the future. It provides peace of mind and gives assurance that you are well prepared in short term to face any immediate expenses.

Retirement goal : Retirement planning is the single most important financial goal common to every individual. It is the only financial goal in which a corpus would get spent over the course of decades! Retirement planning is non-negotiable. Give due importance to this goal before child education and marriage planning.

Child education:

You can calculate monthly required investment to be made for kids education by following this table.

Other important goals:

Like child education you can plan child marriage, car purchase, down payment for house and as well as foreign/domestic vacation in same manner.

Next important step is check whether you have adequate

  • Life insurance and Health insurance for you and your family.
  • Also go for standalone personal accident policy with temporary disability rider.

This way you can set up your financial plan. Sometimes you may find you have high goals but your current financial status may not be sufficient to achieve those. Still pen it down. Its very important to know your wishes. They will keep you motivated to achieve those in the future.

Priorities your life goals. In our life at certain stage of life we may not be in a position to achieve all the listed life goals in this situation you should prioritize your goals. Always give priority for retirement over any other goal then kids education and marriage , house purchase car purchase etc will come later.

Hope these steps will help you plan your financial plan well. Remember these two important things for long term wealth creation

  • Invest regularly
  • Stay invested for long

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