While more and more people are proceeding towards living an over-the-top EMI driven lifestyle forcing them to live a pay check-to-pay check life, thinking about financial planning itself is a sign denoting a financially independent, secured, stable and organized future.
As it’s rightly said that a goal without a plan is just a wish, all your goals related to your financial stability, security and independence require a plan. A well-thought, logical and practically executable plan that not only covers your current financial status, but also secures your desired lifestyle after retirement as well.
Wondering how you can yourself create a financial plan that covers all the aspects of your life? Before thinking any further and getting confused, read this step-by-step process to start and execute and financial planning;
Step 1: Analyze Your Current Financial Position
Before you start the financial planning for the future, it is extremely important to understand your current financial position based on your;
· Income
· Savings
· Fixed and variable Expenses
· Insurance
· Investments
To start with, you can analyse your bank statement showing your income and expenses during the last six months. You can categorise your inflow as fixed income or variable income, and your outflow as saving contribution, loan payments, insurance premiums, fees, other fixed expenses, variable expenses, necessary expenses, luxury expenses and emergency expenses.
This categorisation will help you develop an average income and expense structure which will help you identify the amount and frequency of unnecessary expenses which you can use for saving instead.
Moreover, practising this categorising activity on a regular basis will help you improve your spending habits, increase your savings and create a timely budget to manage your finances on a regular basis.
Step 2: Set Your Financial Goals And Segregate Them According To Long-Term Goals And Short-Term Goals:
Setting financial goals will help you get clarity about what exactly you want to achieve with regard to your finances and practically when you can achieve.
But, whenever you are setting your financial goals, you must remember that;
- The goals should be practical
- Both, long-term as well as short-term goals are equally important for an ideal financial planning
- Focus more on short term goals as achieving them will motivate you to achieve the long-term goals
- Example of short-term goals: Create an emergency fund comprising of your three months income, save Rs.1000 more than last month, avoid luxury expenses worth Rs. 1000
- Example of long-term goals: Reach saving amount of Rupees ten lakhs in five years, write-off existing loan in five years, retire with a retirement income of Rupees fifty thousand per month.
- Keep a regular check on your progress in order to make sure that you are on the right track
Step 3: Insure Yourself Against Financial Emergencies And Risks
As we all know that emergencies can come at any time. And such emergencies can easily disrupt your entire savings and derail your financial plans. Thus, it becomes extremely important to insure yourself against such unpredictable situations using;
- Life Insurance
- Health Insurance
- Disability Insurance and
- House Insurance
Step 4: Payment Plan For Current And Future Loans
Loan instalments and interest have the potential to consume a substantial amount of your income which may disturb the execution of your financial plan. So, it becomes important to consider the total amount of your existing loan along with its interest and duration while creating your financial plan.
Be it a Credit Card Payment, Any Loan From Banks Or Financial Institutions, Loans From Friends And Relatives Or Even Pending Payments, every debt is considered as a loan and needs to be included in your list.
If a major part of your income is getting spent on the loan instalments, it is recommended that you go for debt restructuring and create a revised payment plan in order to make room to accommodate the investments to be incurred in the process of financial planning.
Step 5: Build An Unplanned Expense Fund
As most things in life are unpredictable and unplanned, having a special fund for such unplanned instances will help you face it with minimum stress and overcome it with minimum impact.
While your life insurance, health insurance and home insurance has got your back to major unplanned emergencies, this unplanned expense fund will help you get through minor unexpected instances like;
- Temporary Loss Of Employment
- Car Breakdown
- Appliance Repairing or even
- Theft
Ideally, the amount in your unplanned expense fund should be equivalent to the amount of your total income in six months.
Step 6: Invest For Your Retirement
Now that you have channelised your income to cover all your savings and expenses, it’s time to start investing in long-term investment plans which will help you get the required returns on your retirement.
So, as you start your financial planning for retirement, you need to keep in mind;
- Your Desired Age Of Retirement
- Your Desired Lifestyle After Retirement
- Approximate Amount Of Expenses On Health After Retirement
These post-retirement expectations will help you determine the type, amount and term of investment that you need to make in order to secure your retirement.
Step 7: Tracking The Execution And Success Of Your Financial Plan
Once you have started executing the ideal financial plan that focuses on achieving all your financial goals, you must track its progress and effectiveness at regular intervals. This timely tracking will enable you to identify the areas of improvement, make the required changes to maintain the effectiveness of the plan and get your desired results.
Step 8: Updating The Plan After Important Events
The plan that we make is purely on the basis of our expectations and predictions. But, life always has its own plans. So, after every important event that impacts the execution of the financial plan, for example; Getting Married, Having Or Adopting Child, Hospitalisation, Increase In Income, Completion Of Loan etc.
It is important to update the plan and make the required changes to keep it going on track.
Comprising the most important parts of financial planning, these eight steps will guide you to create a logical, practical and return-worthy basic financial plan that will help you secure and organise your future and achieve your desired financial independence.
But, in case you need any professional assistance, you can always get in touch with the Financial Planning Experts at Fintoo.
Also read – How to check if your Financial Planning is on track
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Disclaimer: The views shared in blogs are based on personal opinion and does not endorse the company’s views. Investment is a subject matter of solicitation and one should consult a Financial Adviser before making any investment using the app. Making an investment using the app is the sole decision of the investor and the company or any of its communication cannot be held responsible for it.
