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Business News/ Money / Personal Finance/  How to make a financial plan and stick to it

How to make a financial plan and stick to it

  • A financial plan can help you be on track and lays down the roadmap for you to achieve your goals. It considers your current financial situation and offers strategies that will help you to accomplish your objectives

Financial planning is not limited to asset allocation, retirement planning, children’s education corpus building, or innumerable scenario analysis. Photo: iStock

For a healthy democracy, a government must implement policies, regulations, and laws in accordance with the constitution. Similarly, for a healthy financial life, an individual must stick to the financial plan and invest according to it.

Managing your money can be a daunting task. A financial plan can help you be on track and lays down the roadmap for you to achieve your goals. It considers your current financial situation and offers strategies that will help you accomplish your objectives.

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Simply put, a financial plan takes into account your earnings and your financial goals. It then tells you where you should invest and how much monthly investments are needed to achieve them. It also specifies the right amount of insurance to cut down the risk and keep you on track.

A financial plan shows you the best path to reach your financial destination. For example, if your goal is to retire in the next 20 years, a plan will tell you to invest in mutual funds and how much you should allocate to large-caps, mid-caps, and small-caps. Without a plan, you could end up investing in products that don’t cover the risks and offer sub-optimal returns.

It is also a reference document for you to check your progress and make the required changes as and when needed.

Basic on a financial plan

The first step is to look at your earnings, expenses, savings, and liabilities. Your savings minus your debt will tell you the net worth. It will give you a starting point.

When you minus your expenses from your income, you will know the money that you can invest each month.

Your expenses may not be fixed. But if you analyse your bank and credit card statements for three-four months, it will give you a rough idea of the monthly outgo. You can also keep a buffer of 5-15% in case there are expenses that you may not have covered.

Next is to look at your goals. Financial planners typically divide your goals as short-term, medium-term, and long-term. Your annual holiday is a short-term goal. Retirement and children’s marriage is a long-term goal. The medium-term goal can be buying a car or a house.

Once you have all these in place, you need to map out a strategy to accomplish your goals. For example, for long term ones, depending on the risk appetite, you can invest 80% in equities. For short-term goals, you can use liquid funds. Including life and health insurance will ensure that death or hospitalisation doesn’t put a dent in your family’s financials.

These are the basics of a financial plan. The actual plan involves much more detailed analysis and investment recommendations.

When to involve an advisor

When you are younger with not much financial responsibility, you can use online tools to make your plan. They would ensure that your basics are covered.

Many online tools allow you to calculate the money you will need in the future for a specific goal. Due to annual inflation, the price of every expense you have in the future is likely to increase. For example, if you need 20 lakh today for your child’s education, after a decade, you could need around 36 lakh considering annual inflation of 6%.

When you list down your medium-term and long-term goals, use the online inflation calculator tool to know the future value. You can then use a goal calculator to know how much monthly investment you need to achieve the future value.

While investing, you can stick to either large-cap funds or exchange-traded funds for your equity allocation. For debt, you can use fixed income instruments when you are starting, as many may not be able to stomach the volatility that comes with debt mutual funds.

But once you have responsibilities, or you have been investing for some time, take the help of a financial planner or investment advisor to make a financial plan. Managing money can be daunting once your portfolio reaches a certain size or you have multiple financial responsibilities. A financial planner will not only make a plan but also suggest changes regularly to your investments.

How to stick to your plan

Don’t be too aggressive about the money you can save each month. If you get too aggressive, you may not be able to stick to the plan. When you start, start with a small amount each month. You can then step up your investments over time.

Don’t start without making a budget. Know your expenses well. Else, it would be challenging to stick to the plan.

Finally, keep two bank accounts – one for expenses and the other for investments. When you get your salary, transfer a fixed amount to the second bank account from which you can invest. Segregating money will help you to know the amount you have for expenses.

Let the financial plan be your guiding light.

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