7 Steps of Financial Planning

1. 7 Steps of Financial Planning

2. Definition Financial Planning refers to the holistic evaluation of an investor’s present financial standing and making use of currently known variables for future prediction of withdrawal plans, asset values and cash flow. Steps Involved While formulating financial strategies everyone has to follow these seven steps. They serve as the perfect staircase leading you towards financial enlightenment. So whether you do it yourself or consult an expert, make sure you give due attention to each of the below mentioned points.

3. Setting Objectives - Goal Planning Goal planning is important to help you realize and set path for your goals. Goals can range from purchasing a dream car to sponsoring children’s education in a reputed college. Once you have the goal set, it becomes easier to work towards the same as now you know how much fund you shall need, and function accordingly. Also make sure that the goals you set have a value assigned to them and they are realistic, and achievable. • Curating an Investment Plan Once the goal is set, the second step involves planning out the investment modules. Tax position, financial situation, timeframe and risk appetite of an individual need to be considered before curating the investment plan. Returns vary according to the type of fund invested in. For example, equity based mutual funds garner higher returns than their debt contemporaries. Different investment products bring along different associated charges. Investors need to check if they are willing to pay the same. They also need to analyze if they can manage their portfolio themselves or shall require the help of a professional agent who will also charge consultancy fees.

4. Knowing your appetite - Risk Management • Saving and investing might fall prey to a large number of inherent risks such as: • Default risk that the institution might fail to achieve its purpose. • Inflation risk that the return generated from investing might fall short of the rising price levels. • Volatility risk coming from the constant fluctuating stock and share prices. • Interest rate risk when your opportunity cost of investing elsewhere is higher than your current interest income flow. You can assess your risk appetite by carefully evaluating, how far you are ready to stretch if the situation demands. It is important to take note of your other financial commitments such as asset purchased on loan and sustenance of dependents before zeroing on your ultimate risk bearing capacity. Insurance serves as the perfect answer to these threatening risk monsters, however the same needs to be started off early to avail the benefit of lower premium rates.

5. Retirement Planning Without a prudent plan in place, you stand a risk of not being able to adhere to your current standard of living in case you outlive your savings. Unfortunate events such as disability and death might also push you further from creating a handsome fund to sustain your future generations. From both the financial and personal perspectives, realizing the comfort filled golden years is an extensive process which calls for years of persistence and sensible planning. Some investment options for retirement funding include superannuation, pension plans, public provident fund, gratuity and national pension scheme. • Setting up a Financial Plan Keeping a tab on present and future cash flows helps in proper investments planning. Having a budget in place sets limits to expenses and makes sure that we don’t go overboard with the same. Budgeting helps in expense regulation and inculcates a saving habit. Ongoing loans also need to be looked after so that you do not miss out on EMI payments which otherwise might attract heavy penalties. Large repayment figures also need to be dealt with cautiously so that they don’t derail you from your overall financial standing.

6. Tax Planning The tax planning steps include analyzing the financial standpoint of an individual from a tax efficiency viewpoint so that his finances can be planned in the optimum possible way. Tax planning brings under its umbrella exemptions, deductions and Income Tax benefits to lower the overall tax liability for a particular financial year. With various tax saving instruments available in the market such as ELSS schemes among others, investors are sure to get spoilt for choice. • Review your Plan The one thing constant in life is change. Thus, your financial plan also needs to be checked from time-to-time to bring it in line with changing demands and aspirations. Impending marriage, education and children can alter your standpoint with change in asset allocation and risk appetite. It is best to review investment plans every six months to save yourself from the worst blow.

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