Breaking down the personal financial plan

The term financial planning is over used by financial journals and marketing companies alike. And the haphazard flow of information in addition to the unnecessary jargon makes you think of financial planning as a complex exercise. All financial planning requires is a systematic approach which involves meticulous planning and constant monitoring. It is, simply, the effort taken to make your money work as hard as you.

Each of us has life goals and financial planning is aimed towards achieving these goals. The process of financial planning consists of four important aspects:

Set goals

Get down to creating a list of your most important goals in a clear and simple manner. It is imperative to differentiate the goals on the basis of the time period; short term, mid term and long term goals.

Let us understand this with an example of Rajesh who is a 35-year old professional, married with a seven-year old child. His goals would be:

  • Short term: purchase a flat in the next five years / trip abroad with family
  • Medium term: child’s education /child’s marriage
  • Long term: retirement planning

Once the goals are laid out, it is important to calculate the target corpus for each of these goals taking the inflation factor into account.

In our example, Rajesh will need to provide for his child’s education when the child turns 18. The current cost of education is Rs. 20 lakh. We assume the inflation rate to be at 5 per cent. The cost of education after 11 years would be Rs.34.2 lakh.

This exercise can be done individually, but, requires a lot of time and effort. So, invest in a financial planner to help you out.

Analyse your net worth

The next logical step would be take stock of your existing assets and liabilities, in other words, prepare a net worth statement. Net worth analysis is a snapshot of your current financial position. The process is simple – just list down all existing assets and liabilities. The difference between the two is your net worth. Do not be alarmed if you get a negative figure, which is likely if you are relatively young with multiple liabilities. Instead of worrying about the possibilities, address the concerns and take corrective steps in line with your goals.

It is prudent to realign the net worth statement on a monthly basis taking into account your ongoing investments. In this case (see table), the individual can invest half of his investible surplus (Rs.10, 000) every month into mutual fund schemes and half into a recurring deposit. This will mean that every month the investors’ assets will increase by Rs. 10,000 each in mutual funds and bank fixed deposits.

Draw up a gap analysis

Once you have your goals chalked out and the net worth calculated, it will be easy to check if your current investment patterns are sufficient enough to help you achieve your goals. This process is called gap analysis. Gap analysis helps in locating loopholes or deficiencies in your existing investment patterns.

For example, say a 30 year old wants to build a retirement corpus of Rs.2 crore and wishes to retire with this amount at age 50. Assuming he continues to hold all his existing investments till his retirement age, it will amount to Rs.1 crore. This analysis shows a deficit (gap) of Rs.1 crore. A financial advisor will help deploy the future investible surplus in such a manner that it will aid in achieving the target corpus.

While it is important to take the help of the expertise provided by a financial advisor, it is imperative that you actively involve yourself in the process. This will help you in case of a change in your advisor and also prevent possible mis-selling.

Monitor your financial plan

The last step of the financial planning process is to design a savings plan with your surplus investible money. This step may involve two to three sessions with your financial advisor where you decide on your future course of investment. The areas of concern which get highlighted by the gap analysis will be looked into in this last leg of financial planning.

The financial advisor will suggest a comprehensive plan which will work towards bridging the gap between the current financial position and future goals. More importantly, he will devise a plan taking into account the risk appetite and risk capacity of the investor. It is imperative to not only follow the plan diligently, but, continuously monitor investments.

There is a possibility that over time your investments may go off track with respect to your targets. A constant monitoring and evaluation of the investment plan ensures focus and helps you stay on course with your financial objectives.

Recommended Model Portfolio For Age 30 – Retirement Planning
Investments    Aggressive Investor    Conservative Investor
Equity MF    30%    20%
Equity Shares    15%    5%
Real Estate    10%    15%
Gold    5%    5%
PPF    20%    25%
New Pension Scheme    20%    30%