A Step-by-Step Guide to Personal Financial Planning

What is Personal Financial Planning?

Personal financial planning is the process of investing towards an individual's financial goals in an organised manner and regularly reviewing them till they are achieved. Every individual's needs are different, and hence, their financial goals are also different. There is no one solution that fits all. Hence, the individual should work with an investment expert for personal finance advice. They can help an individual with a customised goal plan as per their requirements.

The Personal Financial Planning Process

The personal financial planning process involves streamlining an individual’s income and expenses, and investing a part of the income towards financial goals. It is done by selecting appropriate financial products and investing in them regularly. The performance is reviewed regularly till the financial goals are achieved.

The personal financial planning process involves the following steps.

1)      Analysing cashflows

The process begins by making a cash flow statement by listing all the income sources on one side and the expenses on the other side. If your cash flows are positive (income is more than expenses), it is a good thing and you can get started with your personal financial planning journey. If the cash flows are negative (expenses are more than income), you should work towards making them positive.

2)      Networth

The next step is to make a networth statement by listing all the assets on one side and the liabilities on the other side. Assets are what you own and liabilities are what you owe others. If your networth is positive (assets are more than liabilities), it is a good thing. If it is negative (liabilities are more than assets), you should work towards making it positive.

3)      Budgeting

Adopt budgeting to allocate income towards expenses and savings and investments. You can start with the 50/30/20 budgeting method. It allocates 50% of the income towards needs, 30% towards wants, and 20% towards savings and investments. If you can invest more than 20% of your income towards financial goals, it is better.

4)      Goal planning

List all your financial goals and classify them into short, medium, and long-term goals. The classification should be based on the investment time horizon. The classification also influences the selection of financial products for investment. For example, an individual should invest in fixed-income products for short-term financial goals. For medium-term goals, hybrid funds are recommended, and for long-term goals, one should consider equity mutual funds.

5)      Investing in tax-efficient products

While choosing financial products for investing towards goals, an individual should make the most of the tax benefits available. For example, some financial products qualify for a deduction from taxable income under Section 80C of the Income Tax Act. The maximum deduction allowed in a financial year is the amount invested or Rs. 1,50,000, whichever is higher.

Similarly, on redemption/maturity, the income from some financial products is tax-free. On other products, the tax rate may vary based on the type of financial product, the format in which it is held, the holding period, etc. An investment expert can guide you on investing in tax-efficient financial products.

6)      Estate planning

You work hard to build financial assets. However, in the event of your untimely death, you don’t want your family members to run around to claim your assets. Hence, it is essential for you to do estate planning by making a will that ensures the smooth transfer of your assets to your intended beneficiaries after your demise.

7)      Emergency fund and insurance

While investing towards your financial goals, it is important to be prepared for unexpected financial emergencies, or else it can derail your financial planning journey. You should build and maintain an emergency fund with 3 to 6 months of expenses.

All income earners should purchase a term insurance plan. It is a financial backup for your family in the event of your untimely death. You should buy a family floater health insurance plan with an adequate coverage amount for all family members.

Best Personal Finance Strategies for Every Life Stage

An individual goes through various life stages during their financial planning journey. Some of these include the following.

1)      Young unmarried

During this life stage (usually 25 to 30 years), you would have completed your education and joined your first job. At this stage, the individual should start investing towards building a retirement fund. Other goals may include an annual vacation, buying a vehicle, accumulating money for house purchase down payment, etc.

A young individual has a long runway in front of them. Hence, they should consider investing in equity mutual funds for long-term financial goals. Along with starting investments towards financial goals, you should pay attention to your emergency fund, term life insurance, and health insurance.

2)      Married with children

During this stage (usually 30 to 40 years), you would have got married and started a family. At this stage, an individual’s additional goals will include planning for a child’s higher education and marriage. If the individual has taken a home loan, they may add home loan pre-payment to their list of goals.

The individual should regularly review the performance of existing financial products. As and when new financial goals get added, you should sit with your investment expert and make a goal plan to achieve them. During important life events like marriage, childbirth, taking a home loan, etc., you should review your emergency fund, life insurance, and health insurance.

You should make a will to include all your accumulated assets. The will should be reviewed from time to time. Whenever there is a significant change in the assets, you should make a new will.

3)      Pre-retirement

During this stage (usually 40 to 60 years), you would have achieved some of the financial goals like a child’s higher education fund, home loan repayment, etc. The cash flows freed up from achieving these goals may be redirected towards the retirement fund.

The individual should start shifting money from equity mutual funds to fixed income to protect the retirement fund from big sudden equity market falls.

4)      Retirement

During this stage (usually 60 to 80 years), you will be enjoying your golden years. In consultation with the investment expert, you should deploy the retirement fund and make annual withdrawals, such that they take care of your regular expenses. You should review your health insurance cover and ensure the coverage amount is adequate. Review your will and make a new one if the assets accumulated are significantly higher than those in the existing will.

There are various personal finance strategies that an individual can deploy during their various life stages. You should choose one that suits your requirements.

Personal Financial Planning: Your Path to Achieving Financial Goals

The personal financial planning journey is a lifelong journey that starts from the time an individual starts earning and continues till their demise. During this lifelong journey, an individual’s major milestones include various financial goals. The personal financial planning process helps allocate money for investing towards these goals, managing them, and passing the assets as a legacy after your demise. As everyone's financial planning requirements differ, you should work with an investment expert to customise them to your requirements. Thus, the personal financial planning journey can be your path to achieving your financial goals.

FAQ

What is the Best Personal Finance Advice for Beginners? 

There is no one best personal finance advice for beginners as everyone’s financial needs and goals are different. However, the important guidelines to be followed include:

• Start investing early; as soon as you start earning
• Follow a goal-based investing approach rather than returns centric approach
• Invest in equity mutual funds for the long term to benefit from the power of compounding and create wealth
• Have an emergency fund, adequate term life insurance, and health insurance for the entire family at all times.
• Maintain a balance between spending and investing. Don’t spend the entire or most of your income leaving nothing or too little towards investing for your financial goals. Similarly, don’t be too frugal by investing a majority of your income, and thus not enjoying life.
• Rather than a do-it-yourself (DIY) approach, always avail the services of an investment expert. These are qualified and experienced individuals who can guide and handhold you throughout your financial planning journey.

How to Start Personal Financial Planning?

You should start your personal financial planning by sorting your cash flows (make a cash flow statement) and networth (make a networth statement). They will give you an idea of your present situation in terms of where do you stand. You can take it ahead from there with budgeting. It allows you to allocate money towards your expenses and investments. With the money allocated towards investments, you can start investing towards your financial goals.