How to create a sound financial plan

What is the role of a financial plan? A well-made financial plan is, probably, the best thing that can nullify the effect of most financial crises. Your financial plan will act as a guiding torch in your financial journey and help you to get back on track, in case of any negative impact on your savings and investments.

Let’s understand the steps to create a financial plan:

Set Goals: The first step in creating your financial plan is to clearly define the financial goals that you want to achieve. The entire purpose gets defeated if you don’t know what are you saving for. Make it as specific as you can, by segregating your goals, into short-term like buying a car or planning a family vacation or long-term like how and when you want to retire.

Your current net worth: Calculate your current net worth by deducting liabilities from your overall assets to find out the gap. This will help you understand how much money you need to make to achieve your goals.

How much money and when: The whole idea behind making a plan is to differentiate your wants and needs and create a roadmap to achieve both, by making sure that you know how much money you need and when. Do make sure to factore the inflation impact as well.

Understanding your risk appetite: You need to do your risk profiling and understand your risk appetite. This depends on your age, current liabilities, net worth and dependents.

How to invest: Based on your risk appetite, you can invest in the right mix of asset class like debt funds, mutual funds, stock market, real estate, fixed deposits etc.

Once your financial plan is ready, make sure to take care of the following points:

Tax impact: Like death, taxes will always be a certainty though rules and regulations will keep changing. The tax impact will put a dent in your savings. You need to be careful while buying or selling any investment product having a tax implication, which ultimately reduces your returns on your investments.

Emergency fund: While making your financial plan, do set aside certain amount of money, say at least six months of your salary or business income, as an emergency fund. It will help to keep your financial plan on track, in case of an emergency like a medical emergency or other unexpected expenses. This figure may vary depending on your job or business.

Regular monitoring: Once you have followed all the steps and created the best financial plan to suit your goals and needs, you also need to check if you are able to adapt your plan. It should change in accordance with major events like getting married or divorced, having a family, etc. Do a check at regular intervals so that you can be sure that your financial goals are relevant and apt with the changing times and that you are on track.

Follow these steps to create a good financial plan. But creating a financial plan is not only about investing in the right financial products or just monitoring it regularly. You need to ensure that you do not lose money specially on accunt of ignorance. Having a sound financial plan will result in higher gains and lowering the losses in case the market turns red.

The writer is chief gardener at Money Plant Consultancy