A financial plan is a comprehensive evaluation of an investor’s current and future financial goals. Known variables are used to predict future asset values, cash flows and withdrawal plans. Factors such as current net worth, tax liabilities, asset allocation and future retirement and estate plans are taken into consideration with financial planning.
The given metrics are used, in addition with the estimates of asset growth to determine if an investors financial goals can be met in the future, or relevant steps must be taken to ensure that that they are met.
Here are some of the steps that can be taken to create tailor made financial plan:
Begin with a plan: All financial planning begins with knowing yourself. Investors must consider assessing risk tolerance, and set goals based on specific time horizons. Short term goals may include the reduction of tax liabilities, medium-term goal may be to buy property whereas long-term goals may entail saving for your children’s higher education. By determining one’s financial ambition, it will be easy to pick up the right investment products.
Primary goal should include investing to protect: Investing goes beyond investing for high returns. With the right comprehensive financial planning one can protect the two most valuable elements, namely life and health. Other liabilities will also need to be taken into consideration, depending on the investor’s profile. Once these goals have been achieved, the goal to build long term wealth can be achieved and executed.
Identify goals: By creating a goal based comprehensive financial planning the appropriate returns can be calculated to match the end goal. The goals can be segregated into different tenures of 3 years or less for short terms, 4 to 7 years for medium term, 8 to 12 years for long term. 12 years onwards can be invested for the next generation.
Prioritise goals: Strategize the goals depending on importance, time horizon and financial impact based on other goals. Critical goals are non – negotiable, but less relevant goals can be deferred if necessary. Each goal can also have a separate portfolio investment strategy, which will also help in tracking.
Choosing the right investment products: Before the commencement of financial planning, the ability to bear loss in the times of market volatility should be assessed. This is considered as risk appetite. The next step to consider is inflation. Once these factors are taken into consideration, choose products where returns are higher than the inflation rate, to avoid eating into the purchasing power of the returns.
Understanding risk profile and establishing asset allocation: Financial planning includes calculating risk capability and capacity. This will also help to segregate the investment into the appropriate investment category.
Know how much can be invested: Different products have different investment limits. It can either be on the higher limit or the lower. One should take into consideration how much one can risk investing without attracting additional debts. A steady income can be itemised to invest in the appropriate products or portfolio blend.
Be credit aware: Credit usage has become an essential part of life today. However, in terms of investing in stock market, the usage of credit is not recommended. Being careless with credit can lead to a debt trap which can affect investments and the overall portfolio. Moreover, it end goal of your financial planning will be off track.
Revising your plan: With changing market conditions investment, financial planning and strategies need to evolve. Such a step is taken to eliminate potential losses and take advantage of positive opportunities for further investment. Moreover, financial priorities may change in the future. Revising financial plans will help evaluate current plans and help plan for the future.