Checkpoints to Remember While Making a Financial Plan

Evaluating your expenses can take you closer to achieving your life goals

Checkpoints to Remember While Making a Financial Plan
Arunabha Chakraborty 03 May 2021

It is important to have a financial plan. If you do not have one, then put a halt, make the plan and restart your financial activities. For designing one such plan that focuses on achieving your financial life goals, the basic requirements are-

  1. Your Finances Income, asset, and liabilities

  2. Your Goals- Education, marriage, buying a house or a car, international trip, quality retirement life.

  3. Your Risk Appetite- It is the level of risk you are prepared to accept while investing.

First of all, you need to understand your own financial position which includes your monthly or yearly cash flows, both inward and outward. Inward includes salary or business income, rent, income from deposits or dividends, that you incur on an average, in a month or year. You should exclude the emergency one-time expenditure or any one-time income for that matter from these calculations. This calculation will help you to identify the net disposable income which you can use for investments. Once this exercise is done, you need to account for your assets and liabilities. Assets include the approximate value of your land and building, gold, any existing financial investments in banks, post office, mutual funds shares, among others. Although it will be a violation of accounting rules, I would recommend you to exclude the value of your residential house and gold jewelry for the net-worth Calculation, in order to get superior data.

The moment you are prepared with your balance sheet, you need to identify your life goals and the price tag to achieve them. Don’t be too optimistic or pessimistic in identifying your goals, rather as per your financial situation, you should finalise realistic goals and arrange them on a priority basis. The time frame of the goals is one of the most important things. So jot down the time you will need to accomplish them. While selecting the financial instruments for specific goals, keep in mind their maturity period. For a short-term goal, you cannot just depend on equity. Similarly, for a long-term goal, debt cannot be the only option.

Generally, goals more than five years to be achieved are treated as long-term whereas goals that take less than five years are treated as short-term. Financial Planning helps you to fulfill your life goals and have a comfortable retired life.

Benefits of Financial Planning

  1. Helps in managing cash flows and reduces unnecessary expenditures.

  2. Enables maintenance of an optimum balance between income and expenses.

  3. Helps to boost savings and the creation of wealth.

  4. Helps to reduce tax liability.

  5. Maximizes returns from investments.

  6. Ensures better wealth management to achieve life goals.

  7. Secures retirement life financially.

  8. Reviews insurance needs and therefore also ensures that dependents are financially secure in the event of death or disability

  9. Ensures that a will is made.

Golden Rules of Financial planning

1. Life Goals- As a first step, you need to identify your life goals and write them down as per your priorities. Then, you need to find out the future values of funds required to address the financial part of the goals. For example, the fund required to buy a house after 10 years will be much higher than the present value of a similar property.

2. Protection- Before you start investing, please ensure that you have availed adequate coverage of mediclaim and critical illness insurance for you and your family. It is necessary for earning members (who have dependents) to have the required amount of term life insurance coverage. Please don’t make any investment plan before your health and life risks are covered.

3. Investment Portfolio- Now you need to identify the correct Instruments which are capable of achieving your financial goals. Just how flights are suitable for long distances instead of a cycle, similarly, you need to put your money in different financial instruments for different needs, considering their risk-reward ratio, expected rate of return, liquidity and applicable taxes.

4. Stick to Your Plan- Once designed and implemented, stick to your plan and don’t change the investment philosophy every now and then to earn more profit. Consistency is the most important thing in achieving the goals.

5. Tax- You need to find out the optimum tax savings alternatives that are available under IT laws. Paying unnecessary taxes by putting your money in non-tax efficient instruments is a wrong idea. On the other hand, I have found people going for tax-saving instruments beyond the prescribed limits without any strong reason, which also needs to be avoided.

6. Consolidation- To keep control, you need to consolidate your savings. Please don’t keep unnecessary savings accounts with minimum balance maintenance criteria; multiple credit cards, demat accounts, lockers, debit cards, and e-subscriptions with annual charges. Because of auto-renewal and electronic cash renewals(ECS), we usually forget to stop unnecessary expenses.

7. Expenses or Spending- To increase the monthly investable corpus you need to keep a track of your monthly expenses or spending. It is better to write down all your expenses for three months and review them to stop unnecessary expenses.

8.Paying Off Loans- Just think that you are repaying a loan at 10 per cent per annum and making an investment at 5.5 per cent per annum, so basically, you are incurring a loss of 4.5 per cent per annum. To avoid this, you need to monitor your existing loans closely and if possible, try to become debt-free at the earliest. In the case of a business or property loan, the equation and the purpose are altogether different and need to be handled in a prudent manner.

9. Review- Periodical review of the performance of your financial instruments is a must to ensure the achievement of the goals. You need to review and take adequate action if necessary, to ensure that the performances are incommensurate with your long-term financial plans.

The author is Founder, FortunEdge Capital

DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.