Financial Planning: Basic Things to know for Your Financial Planning Process

Financial planning is a great method to get you to your financial objectives and ultimately to financial freedom. But before going through the financial planning process, it’s important to first have a few basics in place. These basics will serve as the foundation for your financial journey and help to protect a sustainable and relatively stable financial future.

In this blog post by Moneyplantfx, we’ll provide you with the basics or things you need to get in order before beginning your financial planning process.

What Is Financial Planning?

Financial planning is a process where you assess your current finances and build a plan to put you in a better place financially. This can include:

• Examining current income, expenses, assets, and liabilities.

• Placing resources towards financial goals.

• Monitoring, reviewing, and modifying plans as new goals are established.

To put it another way, financial planning is an important tool to help you make money work for you so that you can benefit in the present and plan for the future.

Phases of Financial Planning

To understand what financial planning involves, we will simplify the steps that make up financial planning:

• Evaluate Current Finances – Prepare a cash flow statement and net worth statement.

• Establish a Budget – Divide income between expenses, savings, and investments.

• Create an Emergency Fund – Maintain funds in case of unexpected issues.

• Make Sure to Get Insurance Protection– Purchase term insurance, health insurance, and general insurance on assets.

• Set Financial Goals – Establish goals with specific plans, and monitor them.

• Tax Efficiency – Structure investments and savings for the least amount of taxes possible.

• Estate Transfer Planning – Add nominations to financial products and draft a will.

Formulation of Financial Plans

Although there is a holistic type of plan, it is often helpful to distinguish some types of more specialized plans:

1. Cash Flow Planning – This type of plan will help you budget your income across needs, wants, and savings – perhaps using a method like the 50/30/20 rule.

2. Insurance Planning – This plan will help protect your family with term life insurance, health insurance, etc.

3. Investment Planning – Here you would set SMART goals and achieve your objectives through SIIPS and other forms of investment.

4. Retirement Planning – This kind of plan will help you establish a retirement fund that considers inflation and ensures lifetime independence.

5. Tax Planning – Establish a tax plan to maximize your return on investment using various tax saving instruments under Chapter 80C and other sections.

Expert Tips for Building a Financial Plan

• Start early — start when you have your first dollar.

• Always consider inflation when setting your goals.

• Think long-term in your investment strategy in order to benefit from the power of compounding.

• Use equity mutual funds as a vehicle for wealth creation.

• Talk to a qualified expert, don’t rely solely on DIY planning.

Why It Is Important to Develop a Financial Plan

• A financial plan clearly allows you to:

• Clarify and prioritize your goals.

• Identify if those goals are short, medium, or long term.

• Make sure you have good cash flow management.

• Maximize your tax savings.

• Achieve financial independence without sacrificing your lifestyle.

Essential Actions to Take Prior to Starting Your Financial Planning Journey

Next steps are essential actions to take before starting your financial planning journey that will prepare you properly in your journey toward financial independence. 

1. Financial Condition Check – A financial condition check will help you understand your present condition in reference to financial independence. Some important ratios to consider are; Drag to Surplus Per Month Ratio: In a perfect world this would be more than 20%, but the higher the better, Savings in Surplus Per Month Ratio: This is the ratio you want to be above 75%, and this would involve putting your savings into something like an investment option under systematic investment plans (SIP). The Debt to Income (DTI) Ratio: You want this number to be relatively low, the lower it is the more money you can free up for goals.

2. Pay Off High Cost Debt – Paying off all your expensive debt, like credit cards that typically yield an interest rate of 36%-42% annually, would put you in a much better position, long term, so pay your credit card debt off prior to investing.

3. Emergency Fund – Making sure you have 3-6 months’ expenses saved away somewhere for unforeseen events will help you keep moving towards your financial goals.

Frequently asked questions.

1. Why Does One Get A Personal Financial Plan?

Everyone’s goals are different, a personalized plan is designed to reflect your individualized needs.

2. How Would You Define An Temporal Financial Goals:

Short Term: 0-3 years

Medium Term: 3-7 Years

Long Term: 7+ years 

3. How Often Should my Financial Plan Be Reviewed? 

You should meet with an expert every 6-12 months to reward your progress and look to make adjustments.

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