How should I create my financial plan?

Financial planning much more than just selecting which mutual fund to select for one’s investment. People often focus too much time on finding best mutual fund. Here’s a general outline of what I include in my client’s financial planning process. Hope you find this useful. If you feel anything important is missing, please comment so others can benefit.

Goal Identification and Analysis

List down your financial goals: Some of them could be retirement, children education, buying a house, child marriage, planning any overseas vacation etc. It is important to have each goal listed preferably in order of importance.

Analyse the timeline and priority of each goal.

Current Financial Situation Assessment

Note down information about your current financial status: income, expenses, assets, liabilities, investments, insurance coverage, etc. This is important not just for planning investment decisions but also plays key role as part of estate planning.

Risk Tolerance Assessment

Determine your risk tolerance and investment preferences. It is critical to understand how much volatility you are able to handle without losing sleep. Financial planning is more of marathon journey till death. So no plan however lucrative is good if you are not able to enjoy the journey.

Budgeting and Cash Flow Management

Create a budget to track income and expenses. Allocate funds for savings, investments, and other financial goals. You can read this article for how to calculate your expenses correctly so it is more accurate.

Emergency Fund Planning

Area neglected by most people. It is vital to determine the appropriate size of an emergency fund. Identify ways to build and maintain the emergency fund.

Debt Management

Develop a strategy to manage and pay off existing debts. General guideline is to get rid off loans in order of cost (high interest rate).

Investment Strategy

Based on your risk tolerance and goals, research an investment portfolio allocation (stocks, bonds, real estate, etc.). Select specific investment products that align with the your goals.

Tax Planning

Identify tax-efficient investment strategies like maximum contribution to EPF over FDs if lock-in is okay for your goals. Find methods to minimize tax liabilities.

Retirement Planning

Estimate the amount needed for a comfortable retirement. There are many calculators available to know retirement corpus based on inflation and lifestyle. Consider retirement plans (NPS, Annuity etc) and contribution levels.

Insurance Planning

Evaluate the need for life, health, disability, and other types of insurance. Select most cost effective plans. Don’t mix insurance and investments. You can read article on How to Calculate Insurance Needs.

Estate Planning

Create or update essential documents like wills, trusts, and powers of attorney.

Regular Review and Adjustment

Implement a schedule for reviewing and adjusting the financial plan as needed. Generally once a year or in event of any life changing events like birth of child, death / major illness in family are instances when review and adjustments should be done.

Education and Documentation

Educate yourself about financial concepts and strategies. Lot of good resources like this blog are available free on internet. Note down the rationale behind the changes in plan. So this will help you understand logic behind certain decisions.

Software or Tools

Depending on the complexity of the financial plan, you might want to use financial planning software or tools to assist with calculations and projections. Most people should suffice with excel calculations. You can try out tools like INDMoney if you prefer digital way to track your portfolio.

Remember that creating a comprehensive financial plan requires a deep understanding of the individual circumstances, goals, and risk tolerance. It’s often recommended to work with a certified financial planner or advisor to ensure the plan is tailored to the investor’s specific needs. But if you prefer DIY (Do It Yourself), do consider above factors.

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