Key pointers for formulating a successful financial plan

By: |
August 31, 2021 5:53 PM

Timely reviews of investments will help ascertain if the performance of the financial instruments remains in sync with your long-term objectives.

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Unforeseen expenses can sometimes spring unpleasant surprises. But regular investments and savings could go a long way in providing financial stability.

Therefore, it’s imperative to have a financial plan for dealing with unexpected circumstances. Whether one has just started working or is a mid-career, a sound financial plan is necessary for everyone.

First, it’s important to assess cash inflows and outflows before deciding where to invest. Managing funds according to available resources and personal needs are vital.

A financial plan is crucial since it helps to:

  • Maintain an optimum balance between income and expenses
  • Manage cash flows and curb any needless expenditure
  • Avert any potential tax liability
  • Choose the best investment and earn the highest possible return
  • Facilitate better wealth management
  • Secure your retired life financially
  • Solidify insurance planning to ensure the needs of dependents are adequately met

The modus operandi

Before formulating a financial plan, understand your financial situation thoroughly. For this, scrutinize monthly and annual cash inflows and outflows. Ignore one-time emergency expenses and suchlike as these don’t represent the norm. Focus on regular and essential items such as income, rent, groceries, insurance payments and travel, among others. This will give a good idea of the net disposable income that can be used for investments.

Next, evaluate all assets, including any owned land or property as well as gold and existing investments like mutual funds and fixed deposits. To arrive at a more realistic assessment, subtract the value of gold and your residence.

With the above done, you are ready to formulate a financial plan. Now take a look at your goals, which must be shortlisted and prioritized. Consider the funds needed to meet their financial component. For instance, you may wish to own a home sometime later. But note that by the time you are in a position to do so, the price may be significantly higher.

Thereafter, consider whether you are well covered. Adequate medical insurance coverage is essential for your family and you. In the case of dependents, ensure everyone has the requisite term life insurance coverage.

When investing, only do so as per your needs as a one-size-fits-all approach won’t work. Match your investments with goals. Risks should be balanced against the reward, rate of return, liquidity and other relevant factors.

Monitor and review

Once you reach this far, relax since your financial plan is now in place. Of course, the story doesn’t end there! The second phase lies in displaying the discipline to avoid any drastic change to the plan unless a pressing need arises.

Meanwhile, always work towards optimal tax savings under the IT laws. Try to invest in assets that offer lower tax rates. However, taxation should never be the primary criteria for selecting an investment. There may be a catch, including higher risks and lower liquidity. Accordingly, read the fine print to maintain a fine balance between risk and reward.

Also, track all your assets and consolidate where required. Any savings/Demat accounts, credit/debit cards, lockers, etc. no longer used should be closed because specific norms such as minimum balance, auto-renewal and annual fees could lead to unnecessary expenses.

Additionally, monitor existing loans and clear them at the earliest. Otherwise, high-interest outgo on loans will negate the returns on your investments.

Finally, take stock periodically. Timely reviews of investments will help ascertain if the performance of the financial instruments remains in sync with your long-term objectives. If not, decide whether it is wise to hold on or sell and reinvest in another financial instrument or asset.

by, Gaurav Jalan, CEO and Founder – mPokket

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