4 Simple Steps in financial planning
Why Financial planning?
We as human beings generally have aspirations. It is not necessary that we have to have a load of wealth to achieve those aspirations. An individual can create wealth by making a proper financial plan and achieve their goals.
Proper financial planning helps you to manage your income wisely, increase your cash flow by keeping a tab on expenses, increase in cash flow leads to increase in capital, increase in capital can increase your investment capacity, gives financial security of the family, can increase your standard of living and build assets over time.
Steps in Financial Planning
- The first step in financial planning is to identify all your goals – i.e what you would like to achieve. Break the goals into
- Short term goals
- Medium term goals
- Long term goals
It is very important to segregate your goals and the fund required to attain those goals. This is because your investment product choice will based on the length of timeframe (Short term, Medium term or Long term)
- Financial position analysis
- Analyse the assets you have right now and the liabilities that you have.
- Take into account the future expenses and future liabilities that may arise
- Try and make a cash flow statement to give you a bird’s eye view of your income and expenditure. Analyse the excess or shortage of cash you will have at the end of the year
- Also determine your net worth
These statements will give you a picture of where you financial stand, when do you have to control expenses and when can you splurge on yourself or your family. It will also guide you to keep your aspirations on the ground and if they can be achieved or not
- Plan – how you intend to reach the goal
At this stage you know how much money you need, you also know when you need the money and finally you have to take a call on the products you need to invest in to achieve your goal. A person must invest in products based on their needs.
One must remember that a person has various needs. Needs can be categorised into
- Saving needs like to buy groceries etc
- Protection needs – like insurance
- Medium and long term needs
4. Review your financial situation
As we all know that there are many assets that a person can invest in. In some of the assets the return is predetermined and accurate but in other financial assets the return various on a lot of internal and external factors. Like for example returns on savings account, Public Provident find, Post office saving schemes, government or corporate bonds are fixed and generally the risk associated is also low. But in case of other products like mutual funds, equity, derivative, gold, etc, the return is not fixed and the associated risk is also high. By risk we mean the risk of losing your capital.
In the event of such uncertainties, it is best to review your goals every six months and take an educated guess if your current investment options are good enough. Remember not to tinker with your investment options too much and give them time to do their work and give your enhanced returns.
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