What is Financial Planning?
Financial planning is planning your finances to meet your long-term financial goals. You had to be very disciplined when you do this, you must know how much are you earning, what are your expenditures & how much are you going to invest every month and how are you going to achieve your goals.
Financial Planning is very important to lead a Stress-free life.
Steps in Financial Planning
1. Listing down your Goals
Sit down and put your thinking cap on. Write down whatever goals come into your mind. Either small or big. For example:
Buying a Car
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 7 Lacs at that time assuming the rate of inflation”.
2. List down Your Cash Flows
After the first step, we will prepare the list of your cash flows,
Cash flow Statement means, how much money is coming in and going out? Any income earned is a Cash inflow and any Expense is Cash outflow.
It will help you understand how much are you earning & how much are you spending how much is remaining for investing purpose.
3. Understanding and figuring out your Risk-appetite
This is one of the most important parts of financial Planning process.
Risk appetite is the amount of risk a person can take while investing. How much money an investor can afford to lose in order to earn high returns defines your risk-taking ability.
If you are ready to lose 30% of your money over a 5-7 year period, your risk appetite is high
If you are ready to lose 15% of your money over a 5-7 year period, your risk appetite is moderate
If not at all ready to lose your money even 1%, you are not at all a risk taker.
Generally, people in their early age have more risk appetite as they have fewer responsibilities and more freedom to invest & have a lot of high ambitions. Later when they get married and have responsibilities, their risk-taking abilities reduces.
4. Listing down your Financial Goals
At this stage, we would list down your financial goals with the proper deadline. Financial goals are the list of goals which you want to fulfill over the period of time.
Buy a house within 5 years worth 50 lacs.
Vacations worth 2 Lacs within 1 year.
Buy a car worth 4 lacs after 3 years.
5. Making sure your Goals are realistic
Make sure goals are achievable. If they don’t, then you must either lower your goals or increase risk appetite or increase your investments per month. Just Be Realistic !!!!
Your Goals should be SMART :
6. Make the Plan
Once we are through with all these steps, the time has come when we will do planning.For each goal, we will be devising a systematic investment plan & by choosing the correct investment option.
For example: For your child Education, make sure you invest in an asset class which is not very risky. You can invest in diversified equity funds or balanced funds for that and for a short-term goal like buying a car in 1-2 yrs, don’t invest in equities, rather go for a debt fund or a fixed deposit.
Revision of all the above-mentioned steps and making sure everything is correct is the next step. This step is to take action and start executing the plan with discipline and make sure you change your goals, risk appetite as time passes and these things change over time.
8. Managing & Monitoring your Investments
Financial Planning is not a “Buy and Forget” type thing. You need to monitor your Investment Plan after certain intervals to make sure that your investments are on the right path of which you initially thought of.
I will discuss more in-depth about financial planning in the upcoming posts soon.