How to make a financial plan and stick to it

Managing your money can be a daunting task. A financial plan can help you stay on track and lays the roadmap for achieving your goals. It takes into account your current financial situation and offers strategies that will help you achieve your goals.

Read also | Native Americans top Biden’s agenda

Simply put, a financial plan takes into account your income and your financial goals. It then tells you where to invest and how many monthly investments are needed to achieve them. It also specifies the right amount of insurance to reduce risk and keep you on track.

A financial plan shows you the best path to reach your financial destination. For example, if your goal is to retire within the next 20 years, a plan will tell you to invest in mutual funds and how much you should allocate to large, mid and small cap stocks. Without a plan, you could end up investing in products that don’t hedge risk and offer suboptimal returns.

It is also a reference document for you to check your progress and make any required changes as needed.

Financially basic

The first step is to look at your income, expenses, savings and debts. Your savings minus your debt will tell you the net worth. This will give you a starting point.

When you deduct your expenses from your income, you will know how much money you can invest each month.

Your expenses may not be fixed. But if you analyze your bank and credit card statements for three to four months, it will give you a rough idea of ​​monthly expenses. You can also keep a margin of 5-15% in case there are expenses you haven’t covered.

Next, examine your goals. Financial planners typically divide your goals into short, medium, and long term goals. Your annual leave is a short-term goal. Retirement and child marriage is a long-term goal. The medium-term objective can be the purchase of a car or a house.

Once you have all of this in place, you need to strategize how to achieve your goals. For example, for long-term ones, depending on risk appetite, you can invest 80% in stocks. For short-term goals, you can use cash. The inclusion of life and health insurance will ensure that a death or hospitalization will not harm your family’s finances.

These are the basics of a financial plan. The current plan involves much more detailed analysis and investment recommendations.

When to call an advisor

When you’re younger and don’t have a lot of financial responsibilities, you can use online tools to build your plan. They would make sure your bases are covered.

Many online tools allow you to calculate how much money you will need in the future for a specific goal. Due to annual inflation, the price of every expense you will have in the future is likely to increase. For example, if you need 20 lakh today for your child’s education, after a decade you might need around 36 lakh considering the annual inflation of 6%.

When listing your medium and long-term goals, use the online inflation calculator to find out the future value. You can then use a goal calculator to find out how much monthly investment you need to achieve future value.

While investing, you can stick to large-cap funds or exchange-traded funds for your stock allocation. For debt, you can use fixed income instruments when you’re starting out, as many may not be able to handle the volatility that comes with mutual funds.

But once you have responsibilities or have been investing for a while, seek the help of a financial planner or investment advisor to establish a financial plan. Money management can be daunting once your portfolio reaches a certain size or you have multiple financial responsibilities. A financial planner will not only lay out a plan, but also suggest regular changes to your investments.

How to stick to your plan

Don’t be too aggressive about how much money you can save each month. If you get too aggressive, you may not be able to stick to the plan. When you start, start with a small amount each month. You can then increase your investments over time.

Don’t start without making a budget. Know your expenses well. Otherwise, it would be difficult to stick to the plan.

Finally, keep two bank accounts – one for expenses and the other for investments. When you receive your salary, transfer a fixed amount to the second bank account from which you can invest. Money segregation will help you know the amount you have available for expenses.

Let the financial plan guide you.

To subscribe to Mint Bulletins

* Enter a valid email address

* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint. Download our app now!!