Financial planning is a step-by-step approach to meet one’s life goals. A financial plan acts as a guide as you go through life’s journey. Essentially, it helps you be in control of your income, expenses and investments such that you can manage your money and achieve your goals.
A financial plan is a document containing a person’s current money situation and long-term monetary goals, as well as strategies to achieve those goals. A financial plan may be created independently or with the help of a certified financial planner.
Enjoy a better standard of living
Most people assume that they would have to sacrifice their standard of living if their monthly bills and EMI repayments are to be addressed. On the contrary, with a good financial plan, you would not need to compromise your lifestyle. It is possible to achieve your goals while living in relative comfort.
Increase your savings
It may be possible to save money without having a financial plan. But it may not be the most efficient way to go about it. When you create a financial plan, you get a good deal of insight into your income and expenses. You can track and cut down your costs consciously. This automatically increases your savings in the long run.
Attain peace of mind
With adequate funds at hand, you can cover your monthly expenses, invest for your future goals and splurge a little for yourself and your family, without worry. Financial planning helps you manage your money efficiently and enjoy peace of mind. Don’t worry if you have not yet reached this stage. If you are on the path of financial planning, the destination of financial peace is not very far away.
Be prepared for emergencies
Creating an emergency fund is a critical aspect of financial planning. Here, you need to ensure that you have a fund that is equal to at least 6 months of your monthly salary. This way, you don’t have to worry about procuring funds in case of a family emergency or a job loss. The emergency fund can help you pay for varied expenses on time.
Goal based Financial Plan
Goal based financial planning is a method which can help you achieve multiple goals across different stages of life. There are some common life-stage goals of most investors e.g. buying a house, children’s higher education and marriage, retirement planning and leaving an estate for your loved ones. In addition to these goals, some clients may have other goals specific to their individual needs and aspirations e.g. planning for a foreign vacation, buying / building a vacation home, saving a corpus to start a business, accumulating for early retirement etc. Goal based planning is the process of defining different goals, quantifying these goals factoring in inflation and having an investment plan to meet these goals.
Setting goals: You should lay-out all your goals in different stages of life. You should estimate how much money you need for each and always factor in inflation, especially for your long-term financial goals.
Assessing your risk appetite: This is an important step in financial planning because you need to take the right amount of risk to achieve your financial goals. If you take too much risk, you may lose your hard-earned money due to adverse market movement at the time you need it. If you take too little risk, you may not be able to get sufficient returns to meet your goals. Your risk appetite depends on your age, stage of life, goal time-lines and financial situation. You should always invest according to your risk appetite.
Expense Budgeting: You should assess your post tax income, your expenses (essential and discretionary), assets (bank deposits, mutual funds etc.), liabilities (car loans, home loans etc.) and create your budget. Once you have a budget, you know how much you can save and invest in a systematic way for your financial goals. Suggested reading: Maximise your SIP returns in volatile markets.
Prepare an investment plan: This is the final step of the financial planning process. Once you know your goals, risk appetite and asset allocation profile, the rest of the job is simply to calculate how much you need to save and invest based on goal amount, goal horizon and expected return on investment based on your asset allocation. Sometimes in this step, you may realize that you need to save more and cut down some discretionary expenses. Do not despair, if you are not able to save more. You should start with what you can save. Over period of time, as your income goes up, you will be able to save and invest more. You can use facilities like Top-up SIPs, to increase your investments over time and achieve your goals.
Asset allocation according to goals and risk appetite: Risk and returns are interrelated higher risk, higher returns in the long term and vice versa. Different asset classes have different risk profiles, e.g. equity has a higher risk profile compared to gold or fixed income. Remember that for different financial goals, you should invest in the right asset class depending on the goal and risk appetite.