By Sushil Jain
If you are aspiring to become financially independent or at least become financially sound, you need to have certain essential things in place. Without having a plan in place, accumulating and investing on an ad hoc basis will not be fruitful over the long term.
Here are seven steps to help give shape to your financial life.
Step 1: Organise finances
First, organise all your finances. Consolidating all your savings, investments, insurance, debt (personal and business), and non financial assets in one place can be a long-drawn process. Unless you know where you stand at present as far as your finances are concerned, the blueprint of your future financial life will not emerge with clarity.
Step 2: Cash-flow & debt management
Next, you need to jot down all the different sources of inflow and outflow. Inflow sources may include salary or business income, interest or dividend income, rental income, bonuses, amongst others. Take into account the spouse’s inflow also. Segregate the inflow based on their frequency. This will provide you a better picture of cash inflows to take informed decisions.
Similarly, prepare an outflow statement which includes household expenses, business and professional expenses, loan repayment and any other outflows. Some of the expenses could be discretionary expenses while others could be non-discretionary in nature. Segregating outflow over monthly, quarterly, half-yearly or annual basis will help make informed decisions while managing money.
Also find out how much debt you are carrying. The only constructive debt is a home loan as the value of a home is expected to go up over time. Make a plan to get rid of all unconstructive debt as early as possible in life. One must target to get positive cash flow year on year.
Step 3: Emergency cash & risk management
Now, plan for the worst times—job loss, medical emergency, economy and geopolitical uncertainty, etc. Such events may require you to arrange money to tide over the situation. Therefore, have an emergency fund in place. Buy adequate professional indemnity, property insurance, life insurance and health insurance for a comprehensive protection.
Step 4: Managing financial goals
For achieving your financial goals, you need to have a proper plan in place detailing each goal. Start with identifying the financial goals and then estimate its cost and the time duration after which you need to achieve it. The goal at current cost needs to be inflated to arrive at the actual cost for which you will have to save on a regular basis. This is the basic and first exercise for each financial goal.
Step 5: Wealth creation and second income
Building wealth over the long term is a slow process and requires patience. One of the most important factors in wealth creation is the right asset allocation. Based on your risk profile and the goals, you need to devise an asset allocation plan and update periodically based on time horizon, risk capacity and market condition till the goals are realised. Choice of equities, debt, and alternative investment and the allocation towards them will go a long way in the creation of wealth over the long term. While creating wealth consider income generating assets. It will give you the liberty to work on your own terms as the income generating asset will provide you a second income to maintain your lifestyle if required.
Step 6: Wealth management
As your wealth grows, you need to take all the precautionary measures to ensure the wealth grows and not depletes during the accumulation phase. How you manage risks, goals, savings and investments will determine how well you are able to manage wealth over the long term.
Step 7: Estate planning
Transfer of your assets or the wealth created is the last step. To ensure smooth transition of wealth to your legal heirs, you need to have a proper succession plan. Make a Will that will take care of the financial needs and goals of all the family members without any legal discourse in future.
The writer is CEO, PersonalCFO.in