6-step process to personal finance planning
During my last week post –I have deliberated on why one needs to have personal financial planning for self.
In my today’s post will discuss on 6 step process to personal finance planning.
Step 1
Your current situation
Write down your current financial status. This could be by way of listing all your current assets and any liabilities that you may have by way of loans like personal loan, Home Loan, Car Loan etc.
Assets can be financial assets (Like PPF/EPF/Mutual funds) and/or physical assets (like Land, 2nd House, Jewelry etc.
Steps 2
List your goals
You should state all your financial goals and assign them a value and timeline by which you wish for it to be achieved. Post listing them bifurcate them into—short, medium or long-term. For instance, goals like purchasing a sofa set in three months is short term; Family vacation abroad that is two years later is a medium-term goal and your child’s education and your own retirement which may be 10-15 years away are long-term goals.
Step 3
Action plan
You need to now ascertain your risk profile, which is nothing but how much risk you can take when it comes to investing. Risk Profile is derived out of risk attitude and risk capacity.
The kind of risk that you can take will determine the type of financial instruments in which you can put money.
Most important point is risk profile can be enhanced as one gets more familiar with different financial asset classes by reading and by experiencing the performance of those asset classes in smaller doses to start with.
Step 4
Evaluating options
Link a savings and investment option for each of your financial goals. Doing so will ensure you do not mix your investments This will also help in the selection of the appropriate financial instrument in suitable asset classes. Choose investments based on their tax efficiency and not be blinded by returns.
Step 5
Plan implementation
The next stage is to fix a regular sum to invest to achieve your financial goals basis step no 4. This which will make goal-based investing a habit. Being regular with investments also gives you the convenience of achieving your financial goals smoothly
Step 6
Review and revision
Investing for a financial goal is not a one-time exercise. To be on top of your finances, you should evaluate the progress made by your investments to achieve your financial goals at least once a year. This approach will help you understand how your investments are faring, with the opportunity to make any changes to them or restructure your plan if need be.
Last, as you approach closer to each of your financial goals, you should start moving money from equities to more stable debt-type of instruments. This way, you will not be impacted by any major impact to the stock markets, which are far more volatile and can upset your best laid plans.
Source— Various articles on personal financial planning
