Step by Step Guide to Plan Your Finances Successfully

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Proper financial planning is the back born of individual and family. This article, step by step guide to plan your finance, discussing the important elements behind successful financial planning.

Personal Financial Planning is a vast subject. It can be interpreted to different styles and meanings.

Successful financial planning has a simple meaning that, a person should have control over the money all the time.

Unfortunately, most of the individual and the families are not aware about the real power and advantages of having proper financial planning in place! The result will be a total financial trash during various crisis.

Important areas of personal financial planning

For the beginners, planning finance is not a simple one or two step process.

It has three phases:

  • Self-Assessment
  • Planning finances
  • Execution and monitoring

Self-Assessment

This is a starting phase in the financial planning activity. Self-assessment helps to understand the current financial status of a person and family. Ask the following questions to start with this phase:

  • What is your age and when you are planning to retire?
  • What are your main sources of income?
  • Who all are your dependents in family?
  • Your expenses and monthly savings?
  • Your current investment status?

Above questions would provide you exact ideas on the goals needs to be set. Setting goal is the first step in financial planning.

For example, identifying retirement age in advance would help to calculate the required amount in hand while retiring and help to plan to create the same. Considering the current age and remaining years to retire, would help to plan well with available options to achieve the retirement goal.

2: Identifying the source of income helps to balance the expenses through budgeting the finances properly.

3: Details of dependents would help to plan necessary steps, such as insurances, to protect them in case of the absence of the breadwinner.

Self-assessment helps to identify the current financial situation of a person, set future goals and a successful plan to achieve those goals.

Planning Finances

Planning phase is very critical as it decides the success or failure of a financial plan in the future. Planning phase required careful approach over each goal and the steps to achieve the goals. Fail proof planning ensures all the steps are in place for each goal and validate the possibility of achieving the goals.

When planning finances, consider the following points:

Important Point to note: I am not including the “Budgeting Finances” as a point to the below section. Budgeting is mandatory in the personal financial planning and have posted a very detailed article on Budgeting in a separate earlier.

You can click and read the article “Budgeting Finances – A Step by Step Guide” to know all about the budgeting and how it can be done.

  • Protect yourself and family from accidents and medical treatments
  • Securing family and dependents from the demise of breadwinner.
  • Protecting major assets
  • Protect yourself and family from mortgages and loans
  • Meet the unexpected expenses that may occur
  • Plan for your children
  • Plan for your retirement
  • Plan your investments and balancing the same as per your age, risk profile, goals
  • Financial advisory if required
  • Monitoring your wealth and investment status

Utilize the power of insurance policies to protect yourself and families for inconvenience such as medical, demises, loan etc. Read the “Complete the Guide to Insurance” in this blog, for details.

Emergency funds are the best option along with specifically allocated money in the family budget, to meet unexpected expenses. Read the Article about the “Requirement of an Emergency Fund” to know more about this.

There are lots of articles in this blog on investing and how to select best companies to invest. There are articles in this blog providing great ideas about various investment instruments that can be utilized to achieve a goal.

Whether it is investments, budgeting, insurance or anything related to planning finances, it is mandatory to monitor the status time to time to ensure everything is going as expected.

Timely validation as well as churning the investment portfolio also a must have activity to achieve long term financial goals.

Execution and Monitoring

Upon completing the above two phases, now it the execution phase. Now we have exact idea about our goals and the plans in hand to achieve the goal. It’s the time to put them into reality.

Protecting yourself and family:

A major cash losing loophole in the budget is unexpected financial planning is the medical expenses. In order to overcome such situation, utilize the Medi-claim policy by subscribing for self and family.

Securing family and dependents from the demise of breadwinner:

Protecting the family is important in the financial planning process. In order to achieve the goal, the bread winner must subscribe a Term Policy with enough sum assured.

Generally, 7x your annual income is a great idea. Term policies are designed to protect the family of the subscriber in case of the death of the subscriber especially he is the lone bread winner in the family.

As term insurance premium is totally dependent on the age of subscriber, it is advised to subscribe the same at your early age.

Protect Your Assets:

Here is another cheap policy you can apply to protect your major assets like home, appliances jewelries, vehicle etc.

When planning for a vehicle insurance, one should consider Third Party Insurance option. This would help to meet all the expenses happening from a possible accident, that cost you money to the hospitalization expenses of the victim.

If you are living in your own home or a rented house, asset protection policy ensures your home and all the valuable assets would be protect from incidents, theft, fire, disaster, natural calamities etc.

Protect your family from mortgage and loans

If have a mortgage or loan to the only breadwinner in a family, he or she must consider to protect family through applying for term cover against loan. This would avoid the possibility of foreclosures in the absence of breadwinners.

For example, a home loan of 10 laks on a home and the breadwinner died without completing paying off the loan, it is the responsibility of other members to pay the loan on time or it will lead to foreclosure.

In the same time, if a term policy against loan exists, the insurance company will pay-off the remaining amount to the bank. Term policies on loans are coming in cheap premium.

People who have a loans against home or assets must consider subscribing this policy as a protection.

Meet the unexpected situation that cost you money:

There are situations to one’s life not only medical but lots other. As the part of a good financial plan you should be ready to find the fund at any time if there is any such incident take place. These are such incidents or money requirements that will not have any benefits from the above mentioned policy.

A note on above points:

Insurance title and type may vary in different places one lives. There are different terms and condition to the policies in India, US, Canada, UK, Australia, New Zealand etc. One should explore the details of each policy he or she is willing to subscribe, considering the options and terms available for such policies in their nation.

Plan for the Future of Children:

In the personal financial planning this is one of the important goals. Planning for the future of kids required to plan necessary investments well in advance and must be started the children are young.

This could be for higher education, marriage or anything, one should take the advantages through investing in stock markets, mutual funds and other well performing investment instruments available in the market.

It should be done in a structured way to achieve the goal along with time running.

“Dollar Cost Averaging” method to investing in stocks and “Systematic Investment Plans” for mutual funds are the best options to park money little by little, with s fixed duration and for long time, helps to build the targeted sum in the future.

Important Point to note: When investing for kid’s future, it is always recommended to give weightage to Midcap Index funds, Mid Cap Mutual Funds and stocks of Midcap companies in the investment portfolio.

Mid-cap companies have lots of potentials to grow for long term. Invested money on mid cap funds thus grow along with the children.

Intelligent parents always give attention to bring their kid with financial awareness and provide better understanding about the money. This would build savings habits to the kids.

Plan for your retirement:

This is another major goal. Retirement planning activities should be happened in advance by utilizing all the possible options as follow:

Equity investments:

Direct equity investments are the best way to generate long time wealth. Investments in stocks should be started in advance to achieve the required results as it itself meant for long time.

Identifying good companies to invest is a trouble for beginners or even experienced investors. Read the article on “How to Find Best Companies to Invest” would give exact idea to identify right companies.

Mutual funds:

Investing to a set of best mutual funds through systematic investment plan is another option to create wealth slowly. This will not only let the money grow with time, but giving an opportunity to invest with discipline

Mutual fund portfolio can be created by subscribing best funds from Large cap, Midcap, Small cap, Diversified, Sector funds, Index, thematic fund groups and by mixing the same in a better way.

Important Points to remember!

One must be aware about the retirement investment portfolio balancing methods to achieve required result.

For example, it is not advised to have major chunk of money to the equities or equity related investments if a person is near to retirement. But, his major chunk of money to go to safe products. There would not be more than 10% of the total money in the equity or equity related instruments.

Balancing the portfolio depends on various factors:

An investment plan should have proper collection of instruments along with right diversification in place. There should be a good balance between equity and debt funds depends on the age.

For example, building a portfolio at the age of 25 required to have maximum equity related instruments. A person in 55 should have balance the portfolio by giving more weightage to the debt and capital protection instruments than high risky equity investments.

The thumb rule to identify the portfolio balancing is by reducing your age from 100 and the resulted percentage should be invested in equity and the rest is in Debt. For example. if you are aged 30, then 100-30=70. Invest 70% money in equity and rest 30% in debt. Monitor each year and make necessary adjustments to the portfolio to balance well.

Role of financial adviser:

Getting a qualified financial consultant to plan your finances is a good option. Especially the beginners must opt consulting a personal financial planner to plan their finances.

However, selection of the financial planner should be based on his or her qualification, experience as well as the customer satisfaction.

Monitoring Investment Portfolio:

While executing investments, it is important to monitor and make necessary adjustments time to time to achieve required results.

Monitoring a portfolio help to identify the laggards and winners in the investment portfolio and act accordingly.

Monitoring not only providing the opportunity to identify the performance of investment instruments but enable to balance the portfolio to a great extent.

Portfolio monitoring must be dome at lease once in two years or three.

My personal advice is, one should start the financial planning as early as possible after getting first job. This will not only help to accumulate wealth by investing small amounts systematically for long time.

Have a successful financial plan for life!