How to build financial plan: 5 profitable power points

Earlier I have written about merits of financial planning and how to manage its pitfalls. Today lets talk about how to build your own financial plan.

Our marked approach for the financial planning process, named Financial Planning Pyramid came handy. Image source: DNA

Earlier I have written about merits of financial planning and how to manage its pitfalls. Today lets talk about how to build your own financial plan.

During a financial awareness workshop, one of the questions raised was: “What makes a good financial plan and can you explain in a simple manner without any complex jargon?”

Our marked approach for the financial planning process, named Financial Planning Pyramid came handy. Let me share the essential pieces that lead to the financial planning building blocks.

Dream: List down all the short-term (less than three years), medium term goals (three to seven years) and long-term goals (seven years and more)

Reality check: Pen down monthly income, monthly expenses, break down the amount needed for essential expenditures, lifestyle expenditures, EMIs) to arrive at your ability to save; and also list down loans and liabilities.

Available resources: Resources that you will use to achieve your goals. Your existing assets, your existing income surplus.

Way forward: Is a simple snapshot of the financial plan.

The alphabets “ERGRE” sums up the five building blocks of the financial plan.

1. Emergency fund: An emergency fund set aside to meet expenses related to emergency (good/bad), such as sudden travel for marriage of a close relative, gifting a new born of a close family member, repairs to your car, etc, ensuring that long-term investments are not disturbed.

2. Risk protection: Term insurance, health insurance and personal accident insurance (covering temporary, partial or permanent disability) are must. Term insurance is a pure insurance provides a high insurance cover by paying low premium an income replacement strategy. If the person does not die, but is rendered partially and permanently disable, the personal accident insurance comes handy. Health insurance is a must even if you have a company provided one.

3. Goal planning: Post listing down the goal, it is important to assign a current value to each goal; then factor appropriate inflation to each goal to arrive at the future value that will be needed when the goal matures.

4. Retirement planning: Retirement is a separate goal, given its importance. Advanced medical facility is increasing the human life-span. Not receiving salary for few months can be a nightmare for many; leave alone funding for 30 years on passive income.

5. Estate planning: Nomination is not a will. Making a will doesn’t cost anything, but will save a lot of hassle. A will, along with the complete record of all bank accounts, financial assets, insurances, loans and digital assets, such as, collection of arts, photographs, music, etc, are a must.

Watch this Zee Business video here: