In the My Plan section, each month we profile a family and evaluate the feasibility of them being able to reach their financial goals through a thorough analysis of their finances. We engage a financial planner in this exercise, and the entire process is pretty detailed and elaborate. So, when a few people wrote in to check how the process works, we felt it would make immense sense to share what entails the making of a financial plan. And, though the circumstances or characteristics of your life influence your financial concerns and plans, the process is standard for you to make a beginning.

While everyone is different, there are common circumstances of life that affect personal financial concerns and thus affect everyone’s financial planning. Factors that affect personal financial concerns are family structure, health, career choices, and age. The logical first step to financial planning is to set financial goals, which will define your future dreams. Your financial goals could even include retiring a credit card debt or saving for a vaca tion next year. Then there could be goals that have some time to go like buying a house five years later and your own retirement in, say, 2035. Once you’ve identified and prioritised your financial goals, the plan can help you develop a clear-cut savings or investment strategy that can help turn your dreams into reality.

Drawing up a plan

The first part of putting any financial plan into action requires you to control your flow of money. A budget tracks your income and expenses, and helps you direct the flow in the way you want it to go. To construct a budget, first account for all your income. This includes your pay cheque, plus any income you might have from other sources such as rental income, interest on money you have in the bank, or investment income. From that you’ll need to subtract your expenses. Expenses can be broken down into two categories. Fixed expenses are those you have to pay, such as rent or a loan payment, car payments and insurance, utilities, groceries, and clothing. Discretionary expenses are more optional items, such as eating out, entertainment, gifts, and vacation.

A saving plan is an essential part of your financial plan. Without a saving plan, you will not be able to achieve your financial goals. We suggest that you save at least 10 per cent of your salary every month. Remember that the more you save now the easier it would be to achieve your financial goals. Next, we suggest ways in which you can deploy this savings into instruments which will make it grow, which is basically investing. Do factor in the axiom ‘higher the return, higher the risk’ while selecting the instrument in which you will invest to achieve your financial goals.

Having put the plan to action, you next need to be disciplined to follow the advice of investing towards each of the goals. This way, your investments will be mapped for the appropriate goals, which in turn ensure that the plan to achieve your goals is on track. Ideally, you should evaluate the progress made by your investments to achieve the financial goals at least once a year to understand how the investments are faring. Such analysis also gives you the opportunity to make any changes to your investments or restructure your plan if need be.

As you approach closer to each of your financial goals, say a couple of years before they materialise, you should start moving money from equities to more stable debt-type of instruments. This way, you will not be impacted by any major impact to the stock markets, which are far more volatile and can upset your best laid plans. As is with all our advice and suggestion, follow a tax efficient strategy to savings and investments, which will make your plan work a lot better and within the risk that you can take.

olmdesk@outlookindia.com