Ready to level up your personal finance game? Discover how to become a financial pro with ACTION by Vivek Mashrani and Anand Venkitachalam! Dive into this exclusive excerpt for actionable tips on assessing your finances, setting smart goals, and crafting a budget like a boss. Get set to take control of your financial future today!
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Financial planning is a systematic approach to using money wisely so as to achieve your life goals. The process includes an in-depth examination of your current financial status, the setting and prioritization of goals, the formulation of an action plan to reach these objectives, regular review of your progress towards this plan on an ongoing basis and then updating your plan as necessary. Timelines play an integral part in financial planning, as they dictate what investment options are available, your risk tolerance levels and your overall strategic decisions. Understanding your financial situation At the foundation of financial planning lies your understanding of your current financial status—knowledge of your income, expenses, assets, liabilities, risk tolerance, etc., as described earlier. Now that you understand your financial status and have a clear picture of your life goal, aligning with your financial goals should become part of your daily routine. To create an efficient personal finance goal-setting process, follow these steps.
1. Evaluate your financial situation
Evaluate the details of your monthly income and expenses by factoring in all sources (salary, rental income, etc.) against all expenses such as rent, groceries and transportation. Additionally, consider your assets (real estate, stocks, mutual funds, etc.) against your liabilities (home loan, personal loan, credit card debt, etc.). You can calculate your net worth from this, as described earlier.
2. Establish your financial goals
Reflect upon what financial milestones you wish to reach—for example, purchase of a home, saving for college tuition expenses for your children, planning an efficient retirement portfolio or an overseas trip.
3. Establish SMART financial goals
Your goals should be specific, measurable, achievable, relevant and time-bound to help ensure they will actually happen. Rather than setting generic retirement savings goals, such as ‘I want to save for retirement,’ make your goals specific—for example, ‘I plan to save Rs 2 crore by age sixty.’
4. Categorize your goals based on your time horizon for them
Classify your goals based on their expected dates of achievement to more efficiently allocate and prioritize resources towards meeting all your financial objectives. This exercise helps set clearer priorities when prioritizing finances for long-term objectives.
5. Prioritize your goals
Ranking your goals from ‘P1’ to ‘Pn’ is the easiest and simplest way to identify which ones are of highest priority to you, P1 being given top billing and Pn receiving no consideration at all. Establishing your priorities allows you to direct your effort, time and financial resources towards those goals which align best with your values and aspirations. Making more informed decisions regarding where your income, savings and investments go can also ensure that progress is being made towards your more important financial objectives.
6. Estimate the savings needs for each goal
Estimating the total investments required on your part for each of your goals and breaking up those investments into manageable savings targets require the consideration of factors like the time horizons you have in mind, the inflation rates and any associated costs. Using those figures, you can then set realistic savings goals for the allocation of funds for each of your objectives.
7. Allocate savings and assets according to priority
This involves matching up financial resources with each goal’s importance and time horizon. Prioritized goals, such as emergency funds or near-term objectives, often necessitate more conservative savings instruments, like savings accounts or short-term deposits. Medium-term goals could benefit from an array of savings and moderate-risk investments; long-term ones may require higher-risk vehicles like stocks or mutual funds to drive potential growth. By pairing savings and investment instruments with each goal, you can optimize your financial resources while increasing the probability of their fulfilment. Furthermore, this exercise will also assist with identifying lowpriority goals which need to be abandoned or postponed.
8. Establish a budget
A budget involves making a careful inventory of both your income and expenditure in order to craft an account that aligns with your financial goals, tracks your spending habits and savings, where applicable, and also allocates your savings to investments related to those goals. A good budget enables you to prioritize your financial goals while controlling your spending habits so as to stay within your means. The purpose of the budget is to ensure financial stability and prosperity for years to come.
9. Monitor your progress
Regularly assess your financial health using online tools or apps which sync up with your bank accounts to get an accurate picture of where you stand.
10. Review and alter your goals
As life circumstances shift, so must your goals. Marriage, children, health issues, job changes or income adjustments all may necessitate modifications to your financial goals. Financial planning should not be seen as a one-time activity. It is an ongoing journey. Your plan must adapt to your life changes and the shifts in your financial situation. Seeking advice from financial advisers may also prove helpful.
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