7 Steps Guide for your Financial Plan

A survey indicates that 67% of Indians think they are prepared for retirement. Would you like to be in charge of your financial future? I'll take you step-by-step through the process of putting together a complete plan for your finances to put you on the road to financial success. 

This article will provide you with the information you need to reach your financial objectives, whether you're just getting started or want to make adjustments to your current strategy.

With this approach and practical advice, you'll be ready to manage finances wisely in any economic situation.

Get ready to take charge and secure a brighter future for yourself and your loved ones.

The importance of having a financial plan

There are three essential things to keep in mind when making a financial plan:

1. Do you have an adequate Emergency Fund?
2. What is your Savings/ Liquidity Plan?
3. What is your Investment Plan?

Having a financial plan is crucial for achieving financial security and reaching your goals. Without a plan, it's easy to get lost in the sea of financial decisions and lose track of your progress. It allows you to allocate your resources effectively, prioritise your goals, and ensure that you're on the track to achieve them.

Creating a financial plan may seem overwhelming, but with the right guidance and tools, it's entirely achievable. In the following sections, I'll break down the process.

1. Assessing your current financial situation

Before you can create a financial plan, it's essential to assess your current financial situation. This involves taking stock of your income, expenses, assets, and liabilities. By understanding your financial position, you can identify areas for improvement and set realistic goals.

Start by calculating your net worth, which is the difference between your assets and liabilities. Next, analyse your income and expenses to determine your cash flow. This will help you understand how much money you have coming in and going out each month.

Once you have a clear picture of your finances, you can evaluate your spending habits and identify areas where you can cut back. 

Make sure to look for opportunities to reduce unnecessary expenses and redirect those funds towards savings or debt repayment. Remember, the goal is to maximise your income and minimise your expenses to free up resources for future goals.

2. Setting financial goals

Setting clear and specific financial goals is a crucial step in creating a comprehensive financial plan. Without goals, it's challenging to stay motivated and measure your progress. When setting financial goals, it's important to make them realistic, measurable, and time-bound.

Start by identifying your short-term, medium-term, and long-term goals. 

Short-term goals may include saving for a vacation or building an emergency fund. 

Medium-term goals could involve saving for a down payment on a home or paying off high-interest debt. 

Long-term goals might include retirement planning or funding your child's education.

Once you have identified your goals, assign a particular amount and a timeline to each one. This will help you prioritise and allocate your resources accordingly. Instead of saying, "I want to save more money," specify an amount and a date like “I want to save ₹50,000 by June 2024 for my birthday trip to Goa”. This will give you a clear target to work towards.

3. Creating a budget

A budget is a critical tool for managing your finances and achieving your goals. It helps you track your income and expenses, allocate funds to different categories, and stay on top of your financial obligations. Creating a budget involves analysing your cash flow, setting spending limits, and monitoring your progress.

List all your sources of income, including your salary, investments, and any other sources of revenue. 
Next, track your expenses by categorising them into essential and non-essential categories. 

Essential expenses include things like rent or mortgage payments, utilities, groceries, and transportation. 
Non-essential expenses may include dining out, entertainment, and shopping.

Let me illustrate this with an example involving my colleague, Preeti. She owns a family house in Bhilai, but due to her job, she and her family have relocated to Raipur. To manage their living situation, they've rented out their Bhilai house and secured a flat in Raipur.

Preeti, being responsible for her family's well-being, approached me for advice on creating a structured budget. In response, I suggested that she start by listing the following:

Preeti’s Income per month: 

Salary: ₹1,00,000
Dividends from Investments: ₹5,000
She receives rent for her family house: ₹20,000

This brings her total income to ₹1,25,000

Preeti’s Monthly Expenses:

Essential Expenses:
Rent: ₹25,000
Utilities: ₹5,000
Groceries: ₹15,000
Transportation: ₹10,000
Total Essential Expenses: ₹55,000
Non-Essential Expenses:
Dining Out: ₹5,000
Entertainment: ₹3,000
Shopping: ₹7,000
Total Non-Essential Expenses: ₹15,000
Total Monthly Expenses: ₹70,000

Budget Plan I gave her:

Savings (20% of Income): ₹25,000
Emergency Fund: ₹10,000
Investments: ₹15,000
Remaining Disposable Income: ₹5,000 (₹1,25,000 - ₹70,000 - ₹25,000)

My Observations and Adjustments:

1. Preeti is saving a substantial portion of her income, contributing to an emergency fund and investments.
2. She has a surplus of ₹5,000 as disposable income, providing flexibility for unforeseen expenses or additional savings.
3. Preeti may consider adjusting non-essential expenses or allocating more to savings, depending on her financial goals.
4. This budget plan helps Preeti maintain financial balance, allocate funds purposefully, and stay prepared for future needs. Adjustments can be made based on changing circumstances or specific financial objectives.

Once you have a clear understanding of your income and expenses, you can set spending limits for each category. This will help you prioritise your spending and ensure that you're not overspending in any area. 

Consider using budgeting apps or spreadsheets to track your expenses and monitor your progress. Regularly review your budget and make adjustments as needed to align with your financial goals.

4. Managing debt and credit

Debt can be a significant obstacle to financial success. High-interest debt can eat away at your income and make it challenging to achieve your goals. As part of your financial plan, it's crucial to develop strategies for managing and reducing your debt.

Start by listing all your debts, including credit cards, loans, and any other outstanding balances. Calculate the total amount owed and the interest rates associated with each debt. Prioritise paying off high-interest debt first, as this will save you money in the long run.

Consider consolidating your debts into a single loan with a lower interest rate. This can make it easier to manage your debt and potentially save on interest charges. Explore options for refinancing or negotiating with your creditors to lower your interest rates or monthly payments.

Alongside managing your debt, it's essential to maintain a healthy credit score. A good credit score can open doors to better interest rates and loan options. Regularly review your credit report and take steps to improve your credit score, such as paying bills on time, keeping credit card balances low, and avoiding new debt.

5. Investing for the future

Investing is a crucial component of any comprehensive financial plan. It allows you to grow your wealth and achieve long-term financial goals, such as retirement or funding your child's education. However, investing can be complex and intimidating for many individuals.

Start by educating yourself about different investment options, such as stocks, bonds, mutual funds, and real estate. Understand the risks and potential returns associated with each investment type. Consider working with a financial advisor to develop an investment strategy that aligns with your goals and risk tolerance.

Diversification is key to managing risk and maximising returns. Spread your investments across different asset classes and industries to minimise exposure to any single investment. Regularly review your investment portfolio and make adjustments as needed to ensure it remains aligned with your goals.

Remember, investing is a long-term game. Stay focused on your goals and resist the temptation to make impulsive investment decisions based on short-term market fluctuations. Develop a disciplined approach to investing and avoid chasing hot stocks or trying to time the market.

6. Protecting your assets and managing risk

Protecting your assets and managing risk is an often overlooked but essential aspect of a comprehensive financial plan. Life is unpredictable, and unexpected events can derail your progress if you're not adequately prepared. By having the right insurance coverage and risk management strategies in place, you can safeguard your financial well-being.

Evaluate your insurance needs. Consider the different types of insurance coverage available, such as life insurance, health insurance, disability insurance, and property insurance. Assess your risks and determine the appropriate coverage for your situation.

Life insurance is particularly important if you have dependents who rely on your income. It provides financial protection in the event of your death and ensures that your loved ones are taken care of. Health insurance is crucial for managing medical expenses and protecting against the high costs of healthcare.

In addition to insurance, consider creating an emergency fund to cover unexpected expenses. Aim to save three to six months' worth of living expenses in a separate savings account. This will provide a financial safety net in case of job loss, medical emergencies, or other unforeseen circumstances.

7. Reviewing and adjusting your financial plan

A financial plan is not a one-time exercise. It's a dynamic process that requires regular review and adjustment. As your circumstances change and you progress towards your goals, it's essential to revisit your plan and make necessary modifications.

Schedule regular check-ins with your financial advisor, or take the time to review your plan on your own. Evaluate your progress towards your goals and make adjustments as needed. Consider factors such as changes in income, expenses, and risk tolerance.

Be prepared to adapt your plan to changing market conditions and economic circumstances. Stay informed about current events and how they may impact your investments or financial goals. This will enable you to make proactive decisions and adjust your plan accordingly.

The Bottom Line

In summary, a financial plan is the key to taking charge of your financial future. It empowers informed decisions, goal prioritisation, and effective resource allocation. Tailor it to your unique circumstances with the help of a financial advisor.

Remember, it's not a one-size-fits-all solution. Discipline, patience, and a long-term mindset are crucial. 

Assess your current situation, set clear goals, create a budget, manage debt wisely, invest for the future, protect assets, and review your plan consistently. Need help? Check Recipe by Finology’s Financial Planning feature.