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What exactly should your financial plan include

24 Jul 2023

Your investment journey must typically begin with a financial plan. The big question is how do you create a financial plan and what are the essential components that it must include. Remember, financial plan is a long term commitment and hence it needs to be planned meticulously. Let us understand what should your financial plan include with a financial plan example! Here are 7 key things that your financial plan template must necessarily include.

1.  Begin with a statement of goals

We all have dreams for the future but to fructify these dreams we need financing. Whether you want to educate your child abroad, leave a legacy for them, secure your retirement or plan an exotic holiday, you need to plan for them. The first step in your financial plan is to set out your financial goals. Lifetime goals must be backed by a monetary implication because otherwise you cannot plan to reach these goals. Also, goals cannot just be a futuristic statement but must have measurable milestones along the way.

2.  Draw up a statement of your net worth

When you start your financial plan, you must be having some investments. It could be in the form of bonds, equities, mutual funds or even in the form of land and property. Put a value to all these assets and also draw up a list of your liabilities in the form of loans and payables. The difference between your assets and your liabilities will be your net worth. This is your starting point. Then you need to figure out how much this wealth will be worth in the future. For the balance, you need to plan through systematic investment plans (SIPs) that are pegged to clear cut goals.

3.  Have a retirement plan in place

The retirement plan is your gateway to financial freedom in the future. Nobody wants to work all their lives. You obviously want to hang up your boots at some stage and either take it easy or pursue your other passions. But retirement means you need to meet expenses without proportionate income flows. You need to plan for that. Your retirement plan begins by working out the future value of your retirement and then planning backwards through the efficient use of SIPs in equities for wealth creation in the long term.

4.  Plan for your Child’s education

Your child’s education will be a lot more expensive that you can even imagine today. You need to plan for it under two assumptions. Your child needs to have a good education assuming that you are around and also assuming that you are not around. Therefore you also need to build insurance into your child plan. Again, this is a long term goal and you need to make the best use of risk equities to reach this goal.

5.  Integrate your tax plan into your financial plan

This is an extremely important component of your overall financial plan. The Income Tax Act offers you a variety of tax benefits through the use of Section 80C, Section 80D, Section 24 etc. But that is not the point! The problem is that most of investors tend to look at tax planning and financial planning as two independent and discrete activities. More often than not, their tax plans are not aligned with their financial plans. They create a financial plan and then independently do their tax planning by buying Section 80C products. The idea is to integrate the two. To simplify this integration; look at your entire financial plan in post-tax terms! This will solve a lot of problems for you. Gratuity Calculator helps investors assess their financial situation and plan for their future, by providing them a clearer picture about their potential retirement corpus and to help them make informed decisions regarding their investments, expenses, and lifestyle choices after retirement.

6.  Insurance planning is an integral part of your financial plan

The basic rule here is to keep your insurance planning and your investment planning separate. So products like endowment policies, money-back policies, ULIPs are to be strictly avoided. For insurance take a pure risk cover (term policy). Use the power of mutual funds for investment and creating wealth and regular income in the future. But more importantly, ensure that every aspect of your life is insured so that your financial plan does not face any hitches. Ensure that your life is adequately insured. The health of all your family members must also be insured. In addition, there are two more insurance covers you need to focus. All your valuable assets must be insured so that repairs and replenishments do not become a burden on you. Also the unpaid portion of your outstanding loans must be tagged to a term policy so that you do not have to lose the asset so created.

7.  Finally, focus on a detailed contingency plan

Lot of people confuse a contingency plan with taking insurance. They are entirely different. Contingency plan has two key components. For example, you could meet with an accident or you could lose your job. Ensure that you have enough emergency cash with you to take care of the transition. The second aspect is your assumptions may go wrong. Inflation shoot higher or asset returns could trend lower. Have a Plan-B as a back-up in place so that your core goals are not impacted!

When you put these 7 components you actually have a full-fledged financial plan in place. Now it is all about putting the plan into action.

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