Get The Financial Planning Process Right

Most of us at times get so caught up with our jobs that we neglect some basic steps of personal finance. Setting up and following a structured process is essential in ensuring efficient financial management. I enumerate the following steps which are the pre-requisites to ensure good financial health.


1.  Cashflow management: We know what’s being credited in the form of income but we really do not have track of our expenses. If left unmanaged, many a times expenses can rise to the extent of our income leaving very little room to save.  It may sound funny for today’s generation but expense management is the most crucial part of personal finance. If we do not know how much we are spending and on what expense heads then better earn a princely sum so that you need not bother about expenses. Otherwise start tracking your expenses on a regular basis so you very well know how much you can save regularly. It will also help in consciously reducing unnecessary expenditure once you realise that you are spending more than you need to.


2.  Setting Financial Goals: A survey has revealed that most people spend more time in planning their vacations than on their main financial goals. In this step we need to prioritise on our life’s financial goals and categorise them as per short, medium or long term. It’s also essential to allocate an appropriate value for the same. For example if you intend to send your child abroad for his/her masters and it may cost say Rs. 25 lakhs at present value then you need to calculate the future value of this amount at a suitable rate of inflation and plan for the inflated cost then. Some more examples of goals can be, buying a bigger house, early retirement, etc.


3.  Risk Management: Considering ones financial goals and liabilities it’s now essential to work out how much insurance you need. Ideally term insurance is best suited to cover your risk at a modest cost. In the absence of any structured calculation of how much cover you need to have, you can take the thumb rule of at least covering 10 times of your annual income and adding any liabilities such as loans on top of that. Also consider accident insurance as it also covers against partial or permanent disability at a very low cost. Finally evaluate your health cover needs and take a health cover which you can afford. If you are in business then along with your home, it makes sense to cover your business premises/ machinery etc against fire and allied risks.


4.  Contingency fund: Depending on your job/ business stability as well as health status of your family members you can maintain 3 months to 6 months of your monthly expenses in liquid form which can be ideally maintained in a flexi – Fd bank account. If you have old parents at home then you may have to maintain a separate health contingency fund in FDs or debt funds. Don’t plan your investments till you have complied with the above steps.


5.  Investment planning: Now as per your time horizon and risk profile, one needs to allocate the monthly surplus in different asset class as per your financial goals. For example if your child’s post-graduation goal is 2 years down the line, then you need to invest in safe and fixed return assets like fixed deposits or short term debt funds. While if the same goal is 5-7 years away, you can consider investing in balanced or diversified mutual funds as they are expected to perform better in longer periods than fixed income assets. Its ideally better to designate a particular investment to a particular goal. For example if you have to invest Rs. 20000 per month for your childs higher education then designate it for that goal only and do not use that amount for any other goal. For even distant goals like retirement, you can consider a mix of PPF, equity funds and direct equity.


6.  Estate Planning/ Will: Once all insurance and investments are in place along with proper nominations, it makes sense to prepare a will. Ideally will needs to be prepared the moment you own an asset and have dependents. Do not wait till retirement to prepare your will.


7.  Regular monitoring and review: Review your investments on a regular basis like quarterly and insurance cover requirement can be reviewed once a year. Regular review can help you to do any course correction and keep you focussed on your goals. 


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