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So what's a financial plan and why do we all need one?
Financial planning is an aspect of life that can come handy to make all those dreams come true, from travelling to your favourite destinations to gifting your loved ones the life they dream. Here's Sousthav Chakrabarty, Co-founder of CapitalQuotient.com sharing his views on the same. Read ON!
If we go back to our school or college days, we all have, at one point of time or the other, submitted projects. At least once we would have submitted business or project plans for a new product, a project or a company. We had no limitation on the use of creative license, made bold assumptions, showcased phenomenal numbers and crazy growth plans.
At the time though we did this for academic credit, participation in a contest or for the sheer fun of it, going through the exercise was exhilarating and intellectually rewarding.
How many of us have ever created such a project or business plan for ourselves, for our personal lives?
Imagine if we could go back in time and create a plan for ourselves without any restriction or limitation, one which is based in fantasy, where anything is possible and which has all your dreams. This may appear to be in the realm of fantasy, but that is exactly what a financial plan is. It's a dream journal, of sorts.
A Financial Plan is a plan for life. It starts with noting down all your ambitious plans, or what is more commonly referred to as financial goals. A financial goal, in the beginning, may not even be quantified. It can be as abstract as you want - Travel the world, as an example - or buy a beach house. This is where you can exercise your creative license, no holds barred. Plan for anything and everything. At this stage it doesn't matter how crazy or absurd it is, whether its reasonable or achievable, all that comes much later.
There could be quantifiable financial goals too - common ones such as buying or upgrading your car, buying an apartment, planning higher studies for yourself or your children, and securing your post retirement years; or ones based on buying stuff such as a curved Ultra HD TV, an awesome DSLR camera, or the absolutely mind-blowing 29-inch iMac.
Once you have got this out of way, close your eyes and imagine if all of the above came true - how cool would that be?
Now let's see how to fulfill these. We get to the action part of the plan. This is where you start documenting your income, expenses, current liabilities and details about your family. This helps in identifying and quantifying the sources of money which will help contribute towards achieving your goals.
Next take a look at your existing savings and investments. Some of us have adventured into stocks and mutual funds, others have broadly chosen to stick to more easily understood and less riskier avenues such as Fixed Deposits, and few have decided to leave all their savings in their bank accounts. There are a lot of folks who will judge you on your investment choices and say one way (often their way) is the right way and give you a lot of unsolicited advice on how you should manage your money.
Well, don't listen to them.
First off, include all these savings and investments in your Financial Plan. Use a system where you can bring in all of these into one platform and leave nothing out. You should include your Fixed Deposits, your Retirals (read as PF, PPF, etc), Mutual Funds, Bank savings, Stocks, Insurance policies, real estate, etc. Link them to goals, ask for help if you need to figure out which savings or investments to link to which goals. It's not rocket science. Savings or investments which you have set aside for the long term, link them to your long term goals i.e. a goal which you are looking at achieving much later as compared to the rest. Similarly savings or investments which you have made with a shorter duration of time in mind, you can link to your nearer term goals. Again, try to use a system that does all this for you automatically or equips you with enough information to do this as per your choice.
And just like that you will be able to see where your shortfalls are how best you can bridge them. This should also take into account savings that you will generate from your future income as well. Knowing the shortfall is the first step towards meeting them.
There are a host of options available, all at different degrees of risk and return, which you can explore to meet the shortfalls. Understand your risk carefully, if possible take a questionnaire which will help you identify your risk. Based on this you can now take investment decisions to bridge the shortfalls and meet your goals.
It's that easy.
And don't worry if sometimes the required investment is too large to meet a goal - you have the benefit of time, and hopefully your income will keep growing every year. This means that over time you can also increase your investments. So even if the goal seemingly looks difficult to achieve, over time there is a high probability of achieving it, if you remain focused, disciplined and in control of your finances.
Get the Latest & Recommended articles in your InboxCreate a Financial Plan now and see for yourself how powerful this tool can be. It will be your best friend for life. Be true to it, and it will help you achieve anything you want.
P.S. There are a lot of platforms which help in drawing up a Financial Plan online. Take a look at our platform CapitalQuotient. It allows you to create a Financial Plan from scratch, creates goals automatically and allows creation of custom and recurring goals, allows you to add up to 18 different types of investments so that you leave nothing out, and helps you link them to your goals automatically or manually. Once linked, it shows exactly how much you need to invest every month, starting today, and this is based on a chosen risk appetite. You can choose a different risk appetite for each goal.
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Any facts, figures or references stated here are made by the author & don't reflect the endorsement of iU at all times unless otherwise drafted by official staff at iU. This article was first published here on 17th January 2019.