FINANCIAL PLANNING: Five building blocks for your financial plan

Earlier I have written about the merits of financial planning and how to manage the pitfalls of financial planning. Today lets talk about how to build your own financial plan.

During a financial awareness workshop, one of the questions raised was: "What makes a good financial plan and can you explain in a simple manner without any complex jargon."

Fortunately, our trade-marked approach for the financial planning process named Financial Planning Pyramid came handy. Pyramid is one of the most stable structure on earth; the Financial Planning Pyramid is symbolic to a sound and stable financial plan.

Let me first share the essential pieces that leads to the Financial Planning Building Blocks.

Dream (Begin with the End in Mind) – List down all the short-term (less than 3 years), medium term goals (3 – 7 years) & long-term goals (7 years & more).

Reality Check (Where do you currently stand) – Pen down the monthly Income, monthly Expenses – break down amount needed for essential expenditures, lifestyle expenditures, EMIs) to arrive at your ability to save; and also list down the loans & liabilities.

Available Resources – The resources that you will use to achieve your goals. Your existing assets, your existing income surplus.

Way Forward – is a simple snapshot of the financial plan. This captures the five essential building blocks of your Financial Plan.

The alphabets "ERGRE" sums up the 5 building blocks of the financial plan.

Emergency Fund – An emergency fund set aside to meet expenses related to emergency (good/bad), such as a sudden travel for marriage of a close relative, gifting a new born of a close family member, repairs to your car, etc, ensuring that long-term investments are not disturbed.

Risk Protection – Term insurance, health insurance and personal accident insurance (covering temporary, partial or permanent disability) are must.

"WHAT IF" – Term Insurance is a pure insurance provides a high insurance cover by paying low premium – an income replacement strategy. If the person does not die, but is rendered partially and permanently disable, the personal accident insurance comes handy. Health insurance is a must even if you have a company provided one. The cost of hospitalisation has gone up significantly; hence one must consult the personal financial advisor for a combination policy that provides a high sum insurance cover by playing low premium.

Goal Planning – Post listing down the goal, it is important to assign a current value to each goal; then factor appropriate inflation to each goal to arrive at the future value that will be needed when the goal matures.

Retirement Planning – Retirement is also a goal, but is kept separate to emphasis the importance to this goal. Advanced medical facility is gradually increasing human life-span. Not receiving salary for few months can cause a nightmare to many; imagine funding for 30 years on passive income.

Estate Planning – Nomination is not a will. Making a will doesn't cost anything, but will save a lot of hassle. A childless couple bought a residential property in a high-rise apartment in Noida. The husband had an untimely early death. As per the Hindu Succession Act if a husband dies then the wife will have to get NOC from all the deceased husband's siblings. A will, along with the complete record of all bank accounts, financial assets, insurances, loans and digital assets, such as, collection of arts, photographs, music, etc, are a must.

The first two ER (Emergency, Risk Protection) helps to protect hard-earned money

The next GR (Goal & Retirement Planning) adds direction to invest and enables

The Final E (Estate Planning) allows to seamlessly transfer the wealth to the loved ones.

The writer is founder and CEO, FINCART