What is Financial Planning? Its a little stupid definition, but its just planning you finances. You plan your Investments in such a way which meets your financial goals over time.
You must be very disciplined when you do this, you must know from where you the money is going to come to you and how are you going to save or invest it, and in future how are you going to achieve your goals.
Steps in Financial Planning
1. List down your Goals
Prepare a list of financial goals. It can be any requirement like Buying Home, Car, Child Education, Child Marriage, Vacation, Retirement etc. Along with this there must be a very clear timeline associated with the Goal. Something like “I want to buy a Car after 3 years, which will cost 10 Lacs at that time”.
2. List down Your Cash Flows
Prepare the list of your cash flows, cash flow means, how money is coming and going? Any money coming in is Cash inflow and Any Expenses is Cash outflow.
It it help you understand how money is coming to you and how is is utilized and how much is remaining for investing purpose.
Example (yearly) :
By Doing this , you can get very clear of how you are going to get money and how you are going to spend it, and how much you are left with to spend.
3. Understand and figure out your Risk-appetite
This is a very important part of financial Planning, Risk appetite is the amount of risk a person can take while investing. How much money you can afford to loose in order to earn high returns defines your risk taking ability.
For Example:
- If you are ready to loose 60% of your money , your risk appetite is high
- When you are ready to loose 25% of your money , your risk appetite is moderate
- If not at all ready to loose your money even 1% , you are not at all a risk taker.
It depends on you which category you belong in. it depends on individuals Psychology, Family Conditions, Attitude etc.
Generally people in there early age have more risk appetite as they have less responsibilities and more freedom to invest. Later when they get married and have responsibilities, they cant risk money to loose.
4. List down your Financial Goals
At this point, you must be clear with your goals. Financial goals are the list of things for which you need money and you must have a predefined target time.
Example:
Ajay earns Rs 3,00,000 per year with Rs 1,00,000 left for investment, he has moderate risk appetite.
Goals:
1. Buy a Car within 2 years worth 5 lacs.
2. Vacations in New Zealand worth 8 Lacs within 4 yrs.
3. Buy home worth 40 lacs in 10 years.
Here, Goals are not compatible with amount invested per year and with that kind of risk-appetite.
Therefore, Goals must be realistic and achievable, it must not look totally irrelevant.
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5. Make sure your Goals are realistic
At this point you must make sure that your goals do not look unrealistic and unachievable. If they do, then you must either lower your goals or increase risk appetite or increase the investible amount per year. This gist of the matter is, Be Realistic !!!
6. Make the Plan
Once you are done with all these steps, Its the time for the planning.
For each goal you must devise a systematic investment plan, by choosing the correct investment instrument. For example: For your child Education make sure you invest in something which is not very risky for the time period you are going to invest in that. You can invest in equities for that, as Equities are not risky in very long term and generate great return.
But for a short term goal like vacation in 1-2 yrs, don’t invest in equities, rather go for a debt fund or a fixed deposit.
In this way, you have to be clear how you are going to invest for achieving your goals.
7. Review and Take advice
Revise your steps and make sure everything is correct. If you are unclear about anything meet some one who is more knowledgeable than you, See a financial planner or a knowledgeable friend.
8. Take Action and keep Reviewing
The last step is to take Action and start executing the plan with discipline and make sure you change you goals, risk appetite as time passes and these things change over time.
I would be happy to read your comments or disagreement on any topic. Please leave a comment.