How to design a good financial plan?
A comprehensive financial plan should tell you where you stand financially, where you want to go, and the best route to get there
Many people know they need a financial plan to help them set goals in these complex and uncertain times.
But just what is a good financial plan? Think of a financial plan as a roadmap you would use to reach a destination. It marks where you are now, where you want to go, what you want to do along the way, the best route and how fast you want to get there.
Goals : A focused financial plan homes in on a single area, such as funding a university education or an insurance need. You may want two or three focused plans bundled together. Or you may want a comprehensive plan that covers the broad spectrum of your needs.
A good comprehensive plan starts with complete and accurate gathering of facts about your financial life.
Most financial planners start with a fact-gathering questionnaire. They want a clear picture of your income sources and expenses, the amount and types of your existing investments, debts and assets, insurance, retirement accounts, tax situation, estate planning and family status (married, children, etc). They also want to know your risk tolerance and value system.
These facts should be summarised in the plan.
The plan should articulate your personal goals. These will come from the questionnaire or in conversations with the planner, or from what you've written out yourself. Do you want to start or buy your own business, buy a home, fund a wedding, reduce taxes, put children through college or retire? Be specific. Do you want to retire early (how early), retire in the usual way at the usual time, or phase in your retirement?
How important is each goal? Prioritise and decide how much you are prepared to sacrifice in order to meet your most important and immediate goals. These goals are the destinations on your road map. They affect the route you take and and how fast you are willing to travel.
Next, a good plan recommends specific strategies to meet your needs. This is the route on the map. It may be a combination of a savings plan, an investment plan, estate planning tools and some tax strategies.
These recommendations should be customised according to your needs, resources and abilities. The plan may say that you need to save X rupees a month and grow these savings to Y rupees by the time you retire. It will recommend a route that fits your risk tolerance. Emergencies: The plan should also include resources for emergencies.What if you lose your job or become disabled? Such financial setbacks can ruin a well-laid-out plan. Resources can include an emergency fund, the right amount of disability and life insurance, medical insurance and perhaps long-term care insurance.
How much risk? Whether you take the fast or slow route will depend on your risk tolerance, which in turn is determined to a large extent by where you are in your life cycle. Financial Planners says that those starting out – if they can stomach the volatility – can afford to invest the bulk of their assets in equities.
For instance, those in the thirties may allocate 80 per cent to equities and 20 per cent to bonds. Those in the 40s may opt for a 60-40 split. Retirees may go for a 20-80 mix. Here equities provide protection against inflation.
Set mile-posts: The overall plan should include periodic, realistic mile-posts to measure your progress. If your net worth is not growing as fast as you had forecast, examine why. Maybe it was just a down year in the market. Or maybe you've been too cautious with your investments and need to make a change. Put it into practice: Once you have a plan drawn up, put it into practice. If you're not putting it into practice, ask yourself why.
Review periodically: After the plan has been put into action, review it at least once a year or every time there is a major change in family or financial circumstances. For example, you may have been promoted and begin to draw a bigger pay cheque. You may, therefore, be willing and able to take on more risks.
Ultimately, a good financial plan should be clear, realistic, do-able and inspirational. It needs to be monitored regularly. The plan should also be flexible because life has a way of changing the best-laid of plans.
Source: ET
Best Regards
Prakash Nair
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