Individuals looking to manage money effectively should have Financial Plan, which may act as road map toward achieving short term, midterm and long term financial stability. Financial planning is not static, rather it is dynamic and ongoing process and it needs understanding of several factors. With right tools, resources and financial literacy, one can prepare a road map which may help to succeed in achieving financial goals. No one can suggest any road map in financial plan that you can do. Financial Plan all those components of your economic life like income, expenses, saving and investment, debt outstanding, insurance and etc.

In this blog, we will highlight strategies to explore the key steps to create personal financial plan. Financial planning became evident when it is broken in steps.

Personal Finance Review – Personal Finance review provides you an insight into your financial standing, collect documents like bank statement (fixed deposits, recurring deposits and other deposits with banks), insurance policies (life insurance, health insurance and general insurance), shares you hold, investment in mutual funds, tax returns and etc. gathering these information is important steps in financial planning.

Determine Your Financial Position – Financial documents may provide you an idea regarding income, expenses, debt outstanding and asset you hold. This step provides you a picture of your current commitments. However determining financial position is not a onetime event, periodical scrutinize it to adjust your plan and adapt to changing situation. Understanding current financial position is crucial before starting financial journey.

Identify and Prioritize Financial Objectives – Planning a goal and make it happen are two different things. All financial goals are not equal; prioritize them based on urgency and importance. Identify short term, medium term and long term goals. This will help you to allocate resources. Achieving financial goal is a journey that needs planning, discipline and commitment. If you have your financial goal, then you need to choose your investment portfolio clearly. Acronym S.M.A.R.A.T. financial goal may help you with identifying and achieving your financial goals. Let’s check

Specific – Goal must be specific, exactly for what you are saving whether buying car, children education or anything else.

Measurable – Goal must be measurable, how much do you need to save? How much you need at the time of disposal. It must be in terms of monetary value.

Attainable – Make sure your goal is attainable and realistic and develop strategy to achieve it. Such as you need more Rs. 5000/- and working on Saturday and Sunday may fetch you the same amount or more.

Relevant – If you really need to save towards a specific goal, check your goal really matters to you.

Time bound – Set by what date you need it. This may help you to keep accountable. Figure out how you will come up with Rs. 500/- per month to save Rs. 6000/- within a year.

Set Your Financial Goals – Using S.M.A.R.T. method you can set your short term, midterm and long term financial goals.

Short term goal – It differs from person to person, short term financial goal are set to meet immediate expenses, the time frame may be a several months or couple of years. Short term goals are most immediate and good place to start investment process. Setting and reaching short term goal may stimulate you and give confidence and boost foundational knowledge for larger goal. Example may be saving for vacation, paying credit card debt, medical emergency or creating emergency fund.

Midterm goal – It usually take 3 to 5 years, midterm goal should support long term goal even and they should have a time to completion of more than 3 years and less than 5 years. One person midterm goal may be another person long term goals, it depends upon one’s unique situation. A common way to set midterm goal is to trace out your long term goal and break that long term goal into smaller goal that you can achieve in next 3 to 5 years. Midterm goal is bridge between short and long term goals. Examples may be buying a new car, down payment on a home, pay off debt and etc.

Long term goal – It need more than 5 years or even a decade and depends upon the income and other financial obligation. Always use midterm goal as benchmark for your long  term finances. Schedule time to review progress towards long term financial goal and try to understand the long term impact of your short term financial decisions. Consider different safeguard to protect against risk, such as life insurance and health insurance. Common example could be payoff a mortgage loan, goal to meet children’s marriage and education and etc.    

Create a Budget – Budget is the way to make sure you can cover expenses month to month. If you have the fix income making a budget is the right choice. If you have multiple sources of income you need to make list how much money you are making. It is important to decide how much money is to set aside and how much to spend (disposable income to meet day to day expenses). To set a budget, one need to analyze the stands before budgeting and save for the goal, how much one can spend and how much one can save on monthly basis. 50/30/20 approach is there to fix a budget, which set aside 50% on necessities like utilities groceries, 30%on wants like shopping  vacation and 20% on saving and debt payment. A budget may help you feel more in control and make it easier to save money for your goal.

Build an Emergency Fund – Emergency funds are created to meet critical and not avoidable situation, when we need money urgently like medical emergency, job loss time, business loss and other any such family issues. If we have already created an emergency fund then we can handle it well. Thumb rule of emergency fund amount should be 6 to 9 months expenses. Emergency fund is an important part of your overall personal finance, it provide a strong back up for finance in case of crisis or emergency.

Conclusion

By assessing your finance, setting clear goals, creating budget, building emergency fund, you can achieve stability and peace of mind. Financial plan is dynamic and not static and needs to constantly adapt according to the changing needs of the time and economic conditions.