Six steps to create a great financial future

Making your financial plan? Do you want to invest for your future and make your money work as hard as you do? The best person who you can emulate is a financial planner. Certified financial planners follow a six-step process while they devise and implement a financial plan for their customers.

The Six Steps of Financial Planning

Financial Planning Process

Determine the goal and purpose:

The focus of this step is to find the base for planning itself. It is important to know your destination before you start the journey. The steps in the right direction will only take us to the desired destination. A certain degree of awareness of the stock market, financial strengths, weaknesses, future goals and plans, etc. is essential. It is important to understand yourself to be able to determine your future and plan your finances accordingly.

Data gathering or collection:

This is a step where you gather all the information about your finances. You also determine data about your financial goals. Questions one must ask themselves are:

  • What financial goals do you want to achieve?

  • 2.In how much time do you want to accomplish these aims?

For instance, if you want to collect information for your retirement plan, you need to understand annual income, savings rate, years left before you retire, your savings till date, your future major expenditures, expected a rate of return, etc. One must write down this to be able to visualize the data for the next steps.

Data Analysis:

This is a step where you start analyzing the data you have at one place. This will initiate the planning process with some basic assumptions. Suppose you have saved 1 lakh rupees until now. You have 25 years until retirement. You want to save ten lakhs before you retire. How much would you be able to save each month? What rate of interest would you need to invest it for you to arrive at the retirement corpus? You have to use a financial calculator to be able to determine these figures. There are many financial calculators available online which will work out the numbers in seconds.

Develop the plan:

Now you have all the calculations and figures with you. You can start developing the plan. Here you can use the help of a financial advisor, or you can also do it on your own. You have to understand the various instruments of investment before you start investing. If you want to be aggressive, you can invest a part of your funds in equity or mutual funds with high returns. Similarly, you can also choose medium risk or low-risk mutual funds if you feel you do not want to take high risk. You have debt options too which pose no danger. However, the rate of return for these is also small. It is wise to strike a balance between high, medium and low-risk investments and make decisions to be invested in all of these. Depending on your plan you can choose the quantum of investment in each.

Implement the plan:

Now that you have all the calculations and allocations in place, you need to carry out the plan. It is important to invest regularly and stick to your investment plan. Procrastination and delay will affect your funds and plans significantly. You have to be disciplined and get started to reach your goals.

Monitor the plan:

It is important to follow the plan regularly. One cannot implement the plan and forget about it. Many factors can change your plans, and you will have to make the necessary modifications. Personal factors like emergencies, expenditures and career changes can affect the program. External factors like political changes, national elections and economy affect the performance of investment instruments. It is important to tweak the plan and make necessary changes in your investments accordingly.