The Financial Planning Standards Board conducted a survey recently to assess the impact of financial planning on the lives of individuals. According to the survey, 80 out of every 100 Indians support the idea of planning finances for an improved quality of life. Close to 3/4th of the crowd acknowledged feeling confident about their future after financial planning.
While some people prefer relying on certified planners, others prefer doing it themselves to have better control over their strategies. So, for all those preferring the latter, this article takes you through the different steps on how to create a financial plan.
What is personal financial planning?
Personal financial planning refers to planning different aspects of one’s finances. It includes the simplest of aspects, from planning every day’s budget to the bigger picture of retirement planning.
Importance of having a financial plan
The primary objective of financial planning is to tackle uncertainties efficiently. The plan aims to provide individuals with sufficient money at all times, enabling them to meet future and emergency requirements.
As a downside of inflation, the value of money falls over time. Hence, financial planning is essential in ensuring the accurate investment of funds for wealth to grow. This is crucial for the financial well-being of individuals and their families.
How to create a personal financial plan?
One can customise the different aspects of financial planning as per their requirements. However, some essential actions to be part of a robust financial plan are as follows. These steps make the process of financial planning for beginners and the experienced simple and clear.
Also read: Understanding estate planning: Building a timeless legacy for your loved ones
- Examine your current finances
Analysing one’s present financial position is the first step of financial planning. It involves assessing the different income sources and the amount from each source. For example, salary, rent, interest on fixed deposits, etc., are some income sources.
Another component of this step is to understand the expenses. It must include recurring expenses and appropriate a certain amount for one-time expenses. Through this analysis, an individual can ascertain the amount available for other activities, after catering to the usual requirements.
- Goal setting
Once you ascertain the amount available after meeting basic needs, setting a financial goal becomes easy. Financial goals can range from short-term savings to long-term goals such as owning a house. A financial goal is a proven way of staying focused on the journey of achieving financial independence.
Goals must be SMART – Specific, Measurable, Attainable, Realistic, and Time-bound.
For example, “I want to save a large amount of money” is a goal. But, it is not specific, making it hard to measure and achieve. Instead, “I want to save ten lakhs in the next three years” is a SMART goal.
Goals also have to be realistic to be attainable. For example, after the analysis in the first step, Mr A notices that he has ₹10,000 left at the end of every month. He sets a goal to buy a brand-new BMW car in the next two years. This is practically impossible if his income remains at the same level. Hence, analysing the current situation and setting realistic goals accordingly, is essential.
- Budgeting
A budget is a measure of the expected income and expenses for an upcoming period. It suggests how much an individual will be left with at the end of the month to allocate for other purposes such as savings and investments.
A budget acts as a basis for advanced financial planning. Most of the financial thumb rules revolve around budgets. Hence, preparing a budget and sticking to it is necessary.
Also read: How to grow your family’s wealth with smart budgeting and investing strategies
- Debt management
A budget is a measure of the expected income and expenses for an upcoming period. It suggests how much an individual will be left with at the end of the month to allocate for other purposes such as savings and investments.
A budget acts as a basis for advanced financial planning. Most of the financial thumb rules revolve around budgets. Hence, preparing a budget and sticking to it is necessary.
Before making a financial plan for the next few years, it is suggested to clear open debts. Such an approach helps in focusing on new targets rather than spending time on older commitments.
For individuals without sufficient funds to clear off debts beforehand, repayment of such debts should top the priority list while making a fresh financial plan. It is ideal to clear debts sooner to avoid falling into debt traps, where people take new debts to repay the old ones.
- Emergency fund
An emergency fund holds money to meet emergency needs. It can be created as a regular bank account where individuals deposit a certain sum of money at periodic intervals. The objective of this is to avoid financial burden at the time of emergencies.
A basic thumb rule suggests having an emergency fund which has at least three to six months of one’s monthly salary at all times.
- Planning for other financial aspects
Understanding the distinction between saving and investing is essential here. While saving stores money, investing helps it grow. The other components of a financial plan are:
- Investments: Allocating a portion of the budget towards investments in stocks, mutual funds, bonds, and other assets as suitable. Diversification is the key here to maximise rewards and minimise risks.
- Insurance: Owning different kinds of insurance such as life, medical, vehicle, etc., either through the employer or privately, is essential. It helps in making good for financial losses at the time of accidents or demise.
- Retirement planning: Setting aside a portion of disposable income towards retirement is essential for those who wish to have a worry-free retirement life. 10 to 15% of the income towards a retirement fund is a good number to start with.
Also read: Step-by-step guide on retirement planning for baby boomers
- Plan review
A step as significant as making the plan is to review it promptly. These financial plans are not rigid. They depend on various factors, including economic policies such as interest rates, inflation, etc., and personal factors such as income levels, financial commitments, etc.
Hence, they must be reviewed time and again to track the progress. If the plan does not yield the desired result, it must be altered as needed.
Bottomline
Understanding the importance of financial planning and how to make a financial plan is essential for a successful financial journey.
A successful financial journey is one where individuals do not have to worry about recurring salary income and have enough savings and investments to sustain for the rest of their lives. This is only possible with a thorough understanding of personal finance concepts and a well-built financial plan.
