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What is Financial Planning and How to Make One

What is a Financial Plan? A financial plan is a roadmap for managing your money in a manner that builds security and reduces stress. It’s essential for meeting short-term & long-terms goals such as buying a car, buying a house, retirement planning among others.

Creating a financial plan is a tedious task but highly beneficial which can be prepared by a financial planner and even by yourself. Financial goals should be quantified and set to milestones for tracking.

How to make a Financial Plan?

The following steps would help in preparing a suitable financial plan:-

Networth Analysis :- A snapshot of current assets and liabilities would serve as a base to create a suitable financial plan

Determine your Goals:- The first step in Financial planning is to set goals for yourself. It is essential to be clear about why you are implementing a financial plan and what you intend to accomplish with it. This can always be for multiple goals such as buying a car or house, retirement planning or where you want to be financially after a pre-determined tenure. It is therefore important to think about everything that you want to accomplish within the scope of the financial plan. Goals would then serve as a roadmap that would inspire you to work hard towards

Cash Flow Analysis:- You must be aware of your monthly cash flows i.e. both incomes and expenses. An accurate picture is essential to create an effective financial plan. As a thumb rule, most financial planners suggest the 50/30/20 principle Needs: 50% of your pay towards immediate needs (housing, utilities, groceries, insurance, other recurring expenses) Wants: 30% of your pay towards wants (shopping, dining, movies, hobbies) Savings: 20% should be put towards saving and debt-repayments.

Mapping of Assets:- Post a Net worth analysis, there could existing investments earmarked for certain goals. So you must map them for the underlying goals and invest only for the shortfalls. Therefore, mapping each and every asset with each goal is important before one starts investing. Based on the situation, one can then decide where exactly to invest.

Emergencies Planning:- An ‘Emergency Fund’ or ‘Emergency Corpus’ is essentially a fund set aside to meet unexpected expenses and bridge financial shortfalls in times

of crisis. This is the reason why an Emergency Fund must be liquid so that money can be withdrawn without any delay and penalty for early withdrawals. Hence, an amount based on your requirement should be set aside based on your financials. Emergency fund could be 50,000 fund set aside for unexpected bills of 5,00,000 set aside for unexpected medical treatments.

Debt Management:- Debt management is a crucial step in financial planning. This requires you to keep all debt under control that can pile up. This includes short term debts like credit card payments or even short term loans. Interest rates on these short term debt can be so high that it would throw your entire planning in disarry.

Risk Identification:- Even though the financial plan has been made, one needs to factor in the risk element as well. It is therefore important to identify all risk exposures and provide necessary coverage to protect the family and its assets against financial loss. Protection plays an important role in financial planning. This risk management plan should include a full review of life insurance (term plan), health insurance (taking into account treatment inflation at 20%) and disability insurance.

Evolution of Financial Plan:- A financial plan would evolve overtime with the improvement in finances. Hence, you must constantly monitor and re-align your plan as there are many changes every year. There could be changes in valuation of goals as things may not go as planned. For instance, returns expected in the previous 4-5 were 14% but the actual return has been only 5-6%. Such differences, would derail the financial plan and thereby your goals.

A financial plan therefore is not constant in nature but would be evolving based on your incomes and requirements. Effective financial planning is therefore essential to achieve goals, create savings, grow wealth and evolve financially over time. As your financial health improves, you can transition to your own Financial Advisor.


What is Financial Planning and how to make one  
What is Financial Planning and how to make one