This blog is to explain at a very high level, how a financial plan is created. The steps involved and the analysis required at a high level in creating a financial plan. There is a lot of risk involved in the DIY Financial Plan, I believe the benefits to a larger crowd outweighs the risk to a smaller crowd. This DIY Financial plan is aimed at helping people understand the basics.
Basic question is why do we need a financial plan? Well, failing to plan is planning to fail. The first step is to of course understand in detail your “investable income”. The below flowchart is an overview of how your “investable income” (income after living expenses, insurance etc) can be put into good use – i.e. achieve your life goals.
The budgeting of Living expenses + Insurance (term and Life Insurance) + Building the Emergency fund is provisioned. The leftover from your “take home salary” is your “Investable Income”. Please read the blog links for insurance and emergency fund to understand why they are very important.
Now let us look at the Goal Based Investing in a bit detail here, what does it mean.
List Life Goals
First step is to Identify your life goals. Remember SMART goals as explained in the diagram. Preferably keep your every year goals as expenses and separate from this Life Goals. For ex: my goals are Graduation for my son, Post graduation for my son, Sons Marriage, Parents Health etc. You should read more about this here.
Risk Analysis
Secondly understand the riskiness of the instrument vs whether the goal can afford that risky instrument to achieve the goal. Also read up this blog here on our ability to assume risk.
Identify Investable Assets
Thirdly after figuring your risk appetite, find the list of assets you are comfortable investing. Match time period of the goals to the instruments maturity. We should also study if returns from the assets are enough to meet our goals.
Automate investments
Fourth step is to automate the investments as much as possible. There are many tools like Groww, Kuvera, ETMoney, IndMoney to invest free of charges. Pick any tools which works for you, automate your investment.
Monitor
Finally monitor your investments, check if there are significant return expectations change. Remember to realign the goal and reassess risks whenever there are significant changes to your life. If there is a change as the diagram indicates, go back to the start and see if the goals listed make sense. For ex: addition of a new member in the family is a change in life.
Financial planning as you can see is a continuous process. Monitor, re-assess and go back and update the plan if there is a need. These steps are in no way a replacement for a Financial planning done by an expert. Just DIY basics, which will help you learn the basics and start your journey before reaching out to an expert. Good luck 🙂
