Planning is defined as the first step towards a financial well being. Financial planning can be defined as a process through an individual creates a roadmap to meet the expected and unexpected needs of life with an intention to take necessary amount of steps that will ensure a financially equipped future. A good financial plan can help you make your future manageable and secure.
Ideally, financial planning should be done with the help of an experienced financial planner. However, an investor can put in place a good financial plan for himself and his family.
To achieve good results for yourself, the following steps will give you a fair idea about how it should be done to put a good financial plan in place.
Determine your financial goals
For the creation of a financial plan you must be clear about your goals. Write down your goals and set specific targets of what you want to achieve and when you want to achieve. One must involve their family in such decisions, as this will help in giving a bigger picture about the future expectations. Common financial goals include: education, marriage, vacation, purchase of home, emergency fund, planning for retirement etc. The goals that you want to accomplish must be specific, realistic and measurable.
Quantify Your Goals
For successful financial planning one must quantify their goals, here quantifying means figuring out an accurate amount for each financial goal. For example if you are saving for your retirement, what amount do you want once you are retired? Also, when do you wish to retire, all these things will help you in giving a number to your goal. Prioritise each of your financial goals in the order of importance, and then determine how much time you have and how much amount you’ll need to save for each goal.
Study your current financial situation
To study your financial situation you have to calculate your net worth. Net worth is defined as the difference between what you own and what you owe (assets minus liabilities). List down all your assets (this can include cash in hand, savings account, jewellery, real estate, personal property, retirement funds, investments, etc) and also the liabilities (this can include any kind of debt such as mortgage balance, car loans, personal loans, etc). Calculate your net worth by subtracting liabilities from your assets and it is the figure that will give you a fair idea about your current financial situation, which will help in making good decisions and in achieving your financial goals.
Create a monthly budget
Creation of a monthly budget helps in knowing the inflow and outflow of cash. Determine all your monthly sources of income (salary, interest income, other income etc.) and monthly expenses (food, transportation, maintenance charges, credit card payments, car EMI, insurance premium, etc). After determination, subtract your total expenses from your total income, if your income is more than your expenses then you can save the remaining amount, invest it or spend it according to your financial goals. If your expenses are more than your income, then you need to review your budget for expenses which you can reduce or cut down.
Save Your Money
This is the centrepiece of every financial plan, no matter which goal you are targeting for, saving is the means by which one can accomplish their goals. Try inculcating the habit of saving by committing to keep aside a certain amount every month as savings. Save an amount that you think is comfortable for you, saving ten percent of your income is a good criterion to begin with, but this amount can also be increased or decreased as per your financial needs. Most importantly, saving should be considered like an essential expense and should not be ignored if you aspire timely completion of your goals. Through saving, you must set aside enough money to cover your needs for at least three to six months as an emergency fund.
This can be done by keeping your savings in a bank account so that the amount is both protected as well as readily available. Take the advantage of the special saving benefit schemes that are provided by the government or by your employer (such as for education, or retirement) as these schemes can also contribute in reaching your financial goals.
Invest Your Money
Investing has an essential role in your financial planning process as they lay a foundation for the achievement of your financial goals. Common types of investment include stocks, bonds, mutual funds, real estate, commodities etc. However, as an investor you must know that each type of investment has different earning capacity (returns), risks and costs associated with them. It is important that you are choosing the appropriate type of investment while considering your risk tolerance. For example, this type can include stocks which work well if you have high risk tolerance and are saving for medium to long term goals, if you have lower risk tolerance then consider investing in bonds as this will preserve your savings while growing at low but steady rate. It is important to diversify your investments among different instruments because this will ensure that your overall risk is reduced, in the event if one or more instruments took a hit at the same time.
Start planning as soon as possible
Financial Planning should not be delayed if you wish to achieve your goals in time. People, who save or invest small amounts of money early often, tend to do better than those who wait until later in life. Similarly, by developing good Financial Planning habits such as saving, budgeting, investing in proper direction you may achieve your goals with peace of mind and by regularly reviewing your finances early in life, you will be better prepared to meet life changes and handle contingencies.
Evaluate your financial situation periodically
Financial Planning is an ongoing process. Your financial goals may change over the years due to changes in your lifestyle or commitments, such as an inheritance, marriage, birth, house purchase or change of job status. Revision of your financial plan as time goes by is necessary to reflect these changes so that you stay on track with your financial goals.