x

A Financial Plan That You Can Implement

Home »  Talking money »  A Financial Plan That You Can Implement
A Financial Plan That You Can Implement
Deepika Asthana - 27 September 2019

“A Goal without a plan is simply a wish”. There is a difference between goal setting and goal reaching. That difference is planning. A meticulously made financial plan is the path to converting your dreams into reality. Doing so can be simple if you choose to follow the guiding principles discussed below.

Know Your Goals

The reason we set goals is because we have a desire to get to a certain place. As Stephen Covey aptly said in his phenomenally successful book, The 7 Habits of Highly Effective People, “Begin with the end in mind”. This basically means that when you start a journey you must have a clearly defined destination that you wish to reach. In investment parlance, this translates into specific financial goals. To improve the probability of reaching your goals, you must ensure that they are specific, measurable, realistic and have a deadline (time horizon). Clearly articulating the goal will help you determine the return requirements and is the first step in creating a robust financial plan.

Know Your Risk Profile

Would you jump into a pool if you did not know how to swim? Most likely not. On the other hand, if you are a proficient swimmer you might choose to jump into the deep end of the pool. Your decision to jump into the pool is dictated by your ability to swim. Similarly, the investments that you choose to buy should be dictated by your ability and willingness to take risk ie. your risk profile. All investments have some degree of risk. In some cases, the risk is high while in some cases it is low.

As an investor, you have to understand how much risk you can absorb and how much risk you are willing to take. The amount of risk you can absorb would be influenced by your income, age, assets and personal circumstances. The amount of risk that you are willing to take is more behavioural in nature and can be gauged through a psychological test. By aligning your risk profile with the risk profile of your investments, you are ensuring that you build a portfolio that you are comfortable with and that can help you achieve your goals.

Time Horizon

As Covey mentioned, all goals should come with a deadline. Since investments are tagged to a particular goal, it is important to have a timeline in place to achieve that goal. The investment time horizon can dictate the amount of risk you can take and also ensure that you are invested in the right instrument.

Build A Diversified Portfolio

Once you have factored in the aforementioned, it is time to take the plunge. When choosing your investments, ensure that you build a diversified portfolio that is spread across asset classes and instruments. The primary benefit of building a diversified portfolio is to minimise the risk of your portfolio. Different asset classes and instruments, respond differently to market events and news flows. A diversified portfolio will ensure that no particular event or development has an inordinate impact on the overall portfolio returns.

Rebalance And Stay Disciplined

Over time, your goals, risk profile and circumstances can change. Additionally, the investment landscape also witnesses structural changes over the long-term. It is important to periodically review your portfolio and rebalance it to reflect such changes. Over and above everything, it is integral to adopt a disciplined approach to investing and stay tethered to your financial plan.

IIFL Wealth Hurun India Rich List 2019: All You Need To Know
Financial Plan For Youngsters Who Have Just Started Working

Related Articles