Guide to Financial Planning

Step I

Put your house (financial profile) in order

Most of us spend more than half our lives working and saving because money is important, in fact crucial. However, most of us spend almost no time planning to make that hard-earned money work more effectively for us. So, how do you plan your financial life?

Financial planning does not begin at investing, but instead at reviewing your overall financial profile.You need to address the following issues before rushing to build an investment portfolio.

Insure your health, life and assets

You should start your financial planning by taking steps to protect your family’s current lifestyle from events and expenses that are not in your control. You can achieve this by buying appropriate insurance policies for your medical expenses, life, car, and other important assets. You can use moneycontrol's Are You Adequately Insured?

planning tool to estimate your insurance needs.

Repay your high-cost loans

A rupee saved is a rupee earned. Paying your credit card bills on time can save you more money in interest costs than most of your investments could earn you. This is also true of borrowings that cost you more than 15% per annum (after adjusting for any tax benefits). So, invest in repaying your high-cost loans first before you start building your investment portfolio.

Put aside money for emergencies

Deploy some money in short-term investments (you can refer to Financial Investment Options) that can be encashed on demand to help you tide over unforeseen needs and emergencies.

Draw up a savings plan

Income - Expenditure = Savings

You don't want this equation to be left to chance, therefore moneycontrol strongly recommends you make a savings plan. Under your savings plan you should put away as much as you can, as regularly as you can, with the aim to save at least 15% of your take home annual income.Depending on your financial commitments, you may be able to save more or less. It doesn't matter, as long as you are saving something.

Step 2 of financial planning: How to prepare to invest

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Prepare to invest

Investment planning is simpler than you think, and more rewarding than you would imagine. Also, it is irrelevant how old or rich you are, or how small or large your portfolio is - NOW is the best time to start. And no, you do not have to be a financial wizard to make your wealth grow faster. So where does one start?

Identify your financial goals

Explicitly setting out your financial goals is the best way to start. What are your goals? What are you saving for? Buying a house? Your child's education? Your child's marriage? A new car? A world tour? Providing for retirement? Ideally, quantify - both amounts as well as time horizons.

To understand the process of defining and quantifying your future goals, use our Retirement Planner. Even if you do not have retirement planning as one of your financial goals, this planning tool should help you understand the process of financial goal planning.

Understand your risk profile

Each of us has a distinctive capacity for risk (based on our individual income and wealth levels) and a varying tolerance for risk (based on our individual psychological make-up). Understanding your risk profile before you plan your investments is essential to optimize the risk-return profile of your investment portfolio.

moneycontrol’s Risk Analyser Tool can help you profile your risk capacity and tolerance levels.

Plan your asset allocation

Most of us tend to approach investment decisions based on the returns that we want to achieve. Although returns are an end objective, they should not be the starting point in the portfolio construction process. If returns are the primary driver for your investment decisions, you run the risk of a negative impact on your financial health - you could be taking more risk than you are financially/ psychologically capable of or be losing out on potentially higher returns by assuming lower risk than you can bear.

Different asset classes carry different levels of risk. It is important for you to structure your portfolio in a manner in which the resultant risk profile not only matches your individual risk profile but also your liquidity needs. moneycontrol's Asset Allocation Tool can help you structure your financial portfolio keeping in mind your risk profile.

Step 3: Why it is important for you to Start investing NOW

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Start investing NOW

Every day that you gain by beginning early is a day that your money spends working harder for you. So, start planning now! The only thing worse than beginning to invest late is not investing at all.

Use the power of compounding to your advantage

The power of compounding is the #1 reason to start investing early. The sooner you begin investing, the better, because every day that you are invested, is a day that your money is working for you. To understand this better, read Power of Compoundingand Benefits of Starting To Invest Early

Match your investments to your liquidity needs

If you will need cash next year for a down payment to buy a house or for your child's college fees, use one of the shorter term and low capital risk investments for your money, such as liquid/gilt/ money market funds or bank term deposits or top-rated company deposits/ fixed income investment options. In the same vein, invest only that money in short term instruments that you're actually going to need in the short term. For money that you won’t need for at least three, preferably five years, choose the stock market.

Evaluate your investing skills

Finding the right money manager for your investments is an important part of the investment process. You could either manage your money yourself, or invest through mutual funds (or professional money managers).

moneycontrol recommends that you use the first option only if you have the required temperament, aptitude and technical knowledge. You can take our Investment IQ Quiz to evaluate how you fare on each of these parameters.

Financial planning is not about financial expertise and hard work. All it needs is the right approach and discipline. And you’ll see the benefits of this when your money starts working harder for you!

Getting your financial plan in order is half the battle won. To learn and understand more about the different investment options available, read Investing in Fixed Income, Investing in Mutual Funds, Investing in Equities and Insurance.

Happy planning!