The ABC of Financial Planning

Audience: All

Purpose: Understanding the key steps to Financial Planning

Source: The Hindu, New Delhi, March 4 2007

Nature of Blog: Abridged version of the orginal article

Reason for documentation: These are my important notes that help me in Financial Planning. If anyone wants to read for information or knowledge, he/she is most welcome to do so either from this blog here, or from the archives of original source. 

Astute long term planning may make life financially secure, while inadequate or misguided planning may make it awry. Meet your life's goals through prudent management of finances i.e. 'Financial Planning'. Financial Planning covers the various facets of individual's financial needs, which includes: 

a) Accumulating capital - Cash flow planning and budgeting. 

b) Protection against Risk - Insurance planning and risk management. 

c) Investment Planning - and advice. 

d) Estate Planning - Wills and trusts. 

e) Retirement Planning

f) Tax Planning 

You have to start by understanding what are your goals for the future, where do you see yourself financially after 5 years, after 10 years, or after retirement. Once you have realised your goals, you have to put a sound plan in place and follow it. Here are the six basic steps: 

Step 1: Establish your goals - Think long and hard about what you want to accomplish in life - your current status and future potential of your earnings. 

Step 2: Gather data - Start by collecting all your bank and brokerage statements, insurance policies, real-estate documents, and maybe even your most recent tax returns. List your assests and liabilities. You will also need to gather records of all your sources of income and expenses, and anything else you can think of that is related to your finances. 

Step 3: Analyse the data - At this stage you will create a personal net worth statement and a statement of annual cash flows. You will also analyze the adequacy of your estate plan and insurance coverage. As the picture develops, specific shortfalls or excesses will come into focus, along with areas you need to change. 

Step 4: Create a plan - Now you are ready to lay the roadmap that will help you accomplish your goals, given your risk tolerance and time frames. Your plan may call for immediate changes, such as diversifying your investments, shifting your asset allocation, consolidating accounts, optimizing your insurance coverage, or drafting wills and other estate planning documents. Your plan may also call for longer-term actions such as altering your spending and saving habits over time. 

Step 5: Implement your plan - Suitability and performance hold the key here. Remember you can potentially boost the income of your long term investments by keeping cost and expenses as low as possible. Also, take advantage of available tax-free and/or tax-deferred accounts, in addition to your regular taxable brokerage account. 

Step 6: Monitor your plan - This involves keeping an eye on the performance of your investments, periodically rebalancing/churning your portfolio. In the absence of major event in your life, once or twice the year should do it.

 

Milan 

3:58 pm GMT

P.S. The most important is that every now and then revisit the plan and keep a status check on the growth. Life keeps throwing curves now and then, hence a constant monitoring is absolutely essential to ensure that you are on the correct path and at the correct momentum.