Financial Planning: Top 7 Essential Steps

1. What is Financial Plan & Financial Planning -

1.1 A financial plan paints a comprehensive picture of your current finances, your financial goals and any strategies you’ve set to achieve those goals. Creating a financial plan is important because it allows you to make the most of your assets, helps ensure you meet your future goals and gives you the confidence to face any unforeseen circumstances. The Financial Plan is essential to helping you meet your changing financial needs, grow your wealth, stay prepared for potential financial crises, save for retirement, and manage your finances continuingly.

1.2 Financial planning is an ongoing process that can reduce your stress about money, support your current needs and help you to meet your short/long-term goals. Good financial planning should include details about your cash flow, savings, debt, investments, insurance and any other elements of your financial life. Financial planning is a holistic exercise to evaluate your current and future financial standing and thereby enabling you to achieve all your goals systematically. It creates a road map and equips you to meet all your expected and unexpected expenses.

1.3 Financial Planning is not meant only for someone who believes has a lot of money or someone who has very little. It is for anyone and everyone who is not in the capacity to entirely manage one’s finances. All of us have some or the other dream and aspirations. And to achieve these you need to plan your finances. Hence, financial planning is crucial for everyone.

1.4 A financial plan is the road map for your financial life. It covers major financial areas of your life addressing aspects such as cash flow, savings, debt management, risk management, children’s education planning, taxes, retirement, estate planning, and of course, investments and a strategy for managing them. It is more than a guide. It is a written strategy that gives you a clear, pragmatic path to follow towards the accomplishment of your most important financial goals.

1.5 Having a financial plan is like having a travel plan – it identifies where you are going, how and when you will get there, how much will it cost, and things to do along the way. A personal financial plan looks at where you are today and where you want to go. Then it sets out all the steps you need to take to get there. Everyone who is earning should draw up a financial plan. The plan will help you get the most from your money and help you in achieving your financial goals in life.

2. Need for Financial Planning -

2.1 Some feel that saving regularly in bank recurring deposits or Systematic Investment Plans (SIPs) in mutual funds is financial planning. But allocating savings and investments in an ad hoc manner is not enough to achieve your life goals. And such investments lead to inefficient utilisation of your financial resources. To become rich or to achieve all your goals such as buying a house, car, dream vacation, child’s education and so on you need to make money work for you. Besides, salary or business income might not be sufficient enough. This is where financial planning comes to your rescue.

2.2 A financial plan isn’t a static document — it’s a tool to track your progress, and one you should adjust as your life evolves. It’s helpful to re-evaluate your financial plan after major life milestones, like getting married, starting a new job, having a child or losing a loved one.

2.3 Below is a list of scenarios where financial planning might come to our aid. These points will help us to determine whether we need to create a financial plan or not. A financial plan is required if:

You don’t realise where and how your income is spent every month,
When you have various liabilities and just don’t know how to get out of the debt trap,
If you don’t have a road map of how to achieve your dreams,
If your investments are scattered and you are unsure about where you have invested,
You are not sure if you have made the right investments.
If you want to plan for financial goals such as buying your dream home, a car, vacation abroad, child’s education, marriage needs and your retirement among a host of others; prudent financial planning can come to your recourse.
If you don’t have a habit of investing systematically and regularly.
If you have multiple life insurance policies and don’t know which policies to keep.
If your portfolio is skewed towards any particular asset class.

2.4 Do you need a financial plan?

If you have an income, a family or planning to have one in the future, retirement dreams, and many other financial reasons/goals that are unique to you. No one can predict the future but one can certainly be better prepared for it. An effective financial plan will make sure that you are financially prepared to deal with unexpected events and stormy times. If you don’t have one, you’re more likely to end up in a financial mess. On the contrary, if you have one and the recommendations thereon have been executed, most of your financial goals will be satisfactorily met. A good financial plan can alert you to changes that must be made to make sure of a smooth transition through life’s financial phases, such as decreasing spending or changing asset allocation.

2.5 You may be rich or poor, you need a plan in place –

You need not be very rich to have a financial plan. No matter how much you earn and at what age, a plan is important to make your life easier. As your financial situation influences almost every aspect of your life, a regular financial plan can help give you peace of mind and protect you from unforeseen, unfavourable situations. Once you have a working personal financial plan, you can use it to make informed financial choices. Having a good financial plan will allow you an overview of what you can afford. It will allow you to analyse your wants versus your needs. It also provides you with a way to see how to avoid major financial mistakes in the future.

3. Risks of not having a financial plan:

You may be able to achieve what you want today but might not be able to achieve what you need a few years down the line. Say, if you buy a new car now, you might not have enough funds later to buy your dream home.
You may not see the big picture. Say, you may grow your wealth by making good investment choices but end up being tax inefficient and pay more taxes than you need to.
You may take a short-term view of an opportunity and make rushed financial decisions, or fall into some scam trap. Worst of all, you may end up doing nothing (and just thinking of doing something) and never achieve your financial goals.
You might become a victim of miss-selling and build a corpus of investment products that neither suit your financial needs nor your risk profile.
You are very much likely to worry more about money and financial security. You may not know where you are today and where are you heading for.

4. Financial Planning Process –

Financial planning includes budgeting your expenses, investing in the right assets, setting SMART goals, selecting the right asset allocation, tax planning, insurance planning and creating a retirement plan. The inputs to the financial planning process are your finances, i.e., your income, assets, and liabilities, your goals, (i.e., your current and future financial needs) and your appetite for the risk.

i) Defining Financial Goals:

The primary objective of financial planning is to help you achieve your financial goals. It starts by listing, prioritising and classifying them into short-term (up to 2 years), medium-term (2 to 5 years), and long long-term (above 5 years). Make sure your financial goals are: Specific, Measurable, Adjustable, Realistic and Time-Bound (S.M.A.R.T).

ii) Start with a budget:

Budgeting is the process of creating a balanced formula on how to make optimal use of your hard-earned money. Simply put, a budget is an itemised summary of the anticipated income and expenses for a given period, say a month. It helps you to keep your expenses in check and keep you out of debt

iii) Keep a contingency reserve:

An essential component of a solid financial plan is creating an emergency fund (also called a contingency fund). As you know, life is uncertain and emergencies such as loss of job, hospitalisation of a family member, loss of assets, etc. can occur at any time. Ideally, a contingency fund is nothing, but 6 months of monthly living expenses saved. This includes everything from household expenses, to EMI payments, or any other expenses you may incur during a regular month. Therefore, an intelligent approach would be to put away a portion of one’s savings to counter these exigencies if/when they arise.

iv) Asset Allocation is the key:

Asset allocation is the foundation of financial planning. The right mix of equity and debt will help you achieve your financial goals in the time horizon you planned. A common rule of thumb used to decide the proportion of equity in an asset allocation is 100 minus your age (100 – x years). The rationale behind this rule is that the older you get, the less time you have to recover if the stock market tumbles and your risk appetite recedes. At the same time, investing too little in equities could slow your portfolio growth. Making it incapable to keep pace with inflation.

v) Protect with insurance (Insurance Planning):

Life can change in an instant. People with a good financial plan hope for the best, but plan for the unexpected. Insurance helps with that. Just as an emergency fund protects you from unfortunate surprises, insurance protects you against incurring any considerable costs that could significantly detriment your personal financial planning goals. Preparing for the unexpected can save you a great deal of money down the line, in addition to giving you an added level of security day to day.

vi) Plan for retirement. (Retirement Planning):

Even if it’s a long way off, think about what you want your money to do for you when you retire and create a plan to make it happen.

vii) Create an estate plan. (Estate Planning)

You don’t have to be wealthy, old, married, or a parent to need an estate plan, which also lays out who makes financial and health care decisions for you if you can’t make them yourself.

viii) Review & Monitoring -

A regular review of the financial plan increases the possibility of fulfilling goals. This helps you to incorporate personal or economic changes if any. It helps keep a check on whether these investments will help you in achieving the targeted goals.

5. Tips for Effective Financial Plan –

Be realistic with your investment returns; don’t plan to outperform the markets.
Account for market risk and don’t assume the same return to repeat every year.
Don’t forget to plan for inflation, taxes and your financial planner’s fees.
Review your financial plan regularly to see if you are on track or need any changes in the plan.

6. Selection Criteria for a Financial Planner.

Who is your financial planner?

Till now most investors used to focus purely on making investments in various instruments, like Mutual Funds, Insurance, Gold, etc. This was hardly ever backed by thought on financial planning. Now, however, a lot of them seek to create a financial plan which guides them on how much to save and helps them select the right investment instrument.

This is done after a detailed study of their existing investments, income, expenses and risk profile. Today, almost everyone in the financial services industry claims to do financial planning.

The criteria for selecting a financial planner are –

Check the capability of the individual or the organization that you wish to hire as your financial planner. Ask a few simple questions such as:

What is the business model of the company? How does it earn its revenues?
What is the process that they would follow in building the financial plan? Have a look at a sample plan.
What is the team size? Their experience and qualifications?
Are their recommendations based on solid research or driven by commissions?
How long has the individual or the organization been in business? How many clients have they made financial plans for?
Cross-check, if they give references of existing clients with whom you can speak.

7. How to find a right Financial Advisor -

A- Securities & Exchange Board of India (SEBI) –

Securities Exchange Board of India (SEBI), came out with the SEBI Investment Adviser regulations in 2013 to regulate the activities of people who called themselves financial advisors. This regulation was brought in to protect the interest of investors who were taken for a ride by people who were not qualified to provide investment advice. SEBI mandates that compulsory registration for any individual/entity wishing to provide investment advisory services. The SEBI website should help you see the list of SEBI Registered Investment Advisers (RIA) in India.

B - Financial Planning Standards Board (FPSB) –

Certified Financial Planner (CFP) – The Financial Planning Standard Board (USA) has been certifying individuals who pass their stringent norms related to personal finance. This certification has worldwide recognition and is considered the gold standard when it comes to helping individuals manage their finances. You can search for the best financial advisor In India on the FPSB directory.
FPSB Ltd. partners with its global network of Affiliate organizations to administer CFPCM certification programs in 27 countries and territories around the world, representing a global CFP professional community of 203,000+ at the end of 2021 (with 2,338 CFP professionals in India).

C - Network Financial Planning (NFP) –

Network FP is India’s Leading Online Knowledge Platform for Financial Advisors. Network FP’s various programs and events are designed to help financial advisors build and grow their practice /career with a ‘Client First approach. They have started Qualified Personal Finance Professional (QPFP), a certification course for Financial Advisors which has gained huge popularity for its practical application. NFP also maintain a Directory of qualified & trusted financial advisors who can assist the clients.

8. Conclusion -

The need for a financial plan is all the more very important in the turbulent economic times of today. If you don’t have one now, don’t delay any more and Get it now. Don’t be self-satisfied that you will be okay whatever happens. Face the reality. Unless you develop a financial plan early, it will be too late. A financial plan enables you to construct a road map to achieve all your financial goals. It also helps you build your contingency fund for any unforeseen needs that may arise. 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.

Financial planning is the process of developing a personal roadmap for your financial well-being. The inputs to the financial planning process are your finances, i.e., your income, assets, and liabilities, your goals, i.e., your current and future financial needs and. your appetite for risk. This plan is essential to helping you meet your changing financial needs, grow your wealth, stay prepared for potential financial crises, save for retirement, and manage your finances on a daily basis. Smart personal finance involves developing strategies that include budgeting, creating an emergency fund, paying off debt, using credit cards wisely, saving for retirement, and much more. Being disciplined is important, but it’s also good to know when you shouldn’t adhere to the guidelines. What Is a Financial Plan? 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.