In Continuation
to the previous posts regarding What
is Financial Planning and its scope, Benefits
of financial planning, How
To Make Financial Planning Work For You?, now are ready to know the 6 step Financial Planning Process
Guide in this post.
This step by
step Financial Planning Guide is designed to help you overcome all of the
obstacles faced in the way of your personalized financial plan preparation.
The financial
planning process is a logical, six-step procedure:
(1) Determining
your current financial situation
(3) Identifying
alternative courses of action
(4) Evaluating
alternatives
(5) Creating and
implementing a financial action plan, and
(6)
Re-evaluating and revising the plan.
Step 1: Determine Your Current Financial
Situation
One should
identify his/her wealth status prior to beginning with your financial planning.
This is the foremost crucial step in the financial planning process; you will
determine your current financial situation with regard to income, savings,
living expenses, debts and commitments. Preparing a list of current asset and
debt balances and amounts spent for various items gives you a foundation for
financial planning activities.
If you are an
earning individual, your source of income could be your monthly pay check, and
if you are running a part-time business, then the income generated from that
business would also add to your income. Once you know how much you get each
month, you will know what you can afford to spend and how much you can invest.
Step 2: Develop/Identify your Financial
Goals
This is the next
crucial step where you must answer What are the financial goals you want to
achieve?. To know the answer, Develop a list of financial goals based on your
time frame for achieving expected results and your risk-appetite. It can be any
requirement like Buying Home, Get out of Debt, Buying Car, Child Education,
Child Marriage, Vacation, Retirement, Establish wealth etc... Along with this
there must be a very clear timeline associated with the Goal. Something like
"I want to buy a Car after 4 years, which will cost 8 Lacs at that
time" . The purpose of this financial goals analysis is to differentiate
your needs from your wants. Figuring out where you want your money to take you
will help you find a reason to start saving and investing. The knowledge of
your current financial condition will help a person to decide which needs to
choose according to its priority. Always frame your personal / financial goals
using SMART Principle (S- Specific; M- Measurable; A- Achievable;
R- Realistic; T- Time-bound) to create effective and efficient
result-driven goals.
Step 3: Identify Alternative Courses of
Action
Based on your
financial situation, alternative ways should be identified in this step to
reach your goals. Creativity in developing alternatives is vital for making
good decisions. Although many factors will influence the available
alternatives, possible courses of action usually fall into these
categories:
# Continue the
same course of action.
# Expand the
current situation.
# Change the
current situation.
# Take a new
course of action.
Not all of these
categories will apply to every decision situation; however, considering all of
the possible alternatives will help you make more effective and satisfying
decisions.
Step 4: Evaluate Alternatives
Next, you need
to evaluate possible courses of action, taking into consideration your life
situation, personal values, current economic conditions and your financial
situation.
Keep in mind
that every choice has a consequence and every decision closes off alternatives.
For example, a decision to invest in stock may mean you cannot take a vacation.
A decision to go to school full time may mean you cannot work full time.
Opportunity cost is what you give up by making a choice. This cost, commonly
referred to as the trade-off of a decision, cannot always be measured in currency
(Rupees).
Step 5: Create and Implement a
Financial Action Plan
Once you are
done with all these steps, you must develop and implement an financial action
plan. This requires choosing ways to achieve your goals and objectives based on
your risk appetite and time frame. Example, for a short term goal like vacation
in 1 year, don't invest in equities, rather go for a debt fund or a fixed deposit
or a recurring deposit. As you achieve your immediate or short-term goals, the
goals next in priority will come into focus.
Step 6: Re-evaluate and Revise Your
Plan
Once the plan
has been implemented, you should review your financial plan from time to time
to evaluate how it is working for you. Financial planning is a dynamic process
that does not end when you take a particular action. You will need to regularly
assess your financial decisions based on changing personal, social, and
economic factors. Most investments are long-term, so you can most likely
anticipate having annual reviews. Of course, if your life changes through job
change or loss, marriage, divorce, disability or another unforeseen
circumstance, you should revise your plan as soon as possible and rework any
changes necessary to suit your new situation. So, regularly reviewing your
financial plan will help you make priority adjustments that will bring your financial
goals and activities in line with your current life situation.
A well planned
and communicated financial planning process could improve your personal status,
give financial freedom by looking to the future and anticipating expenses, increase
control over your financial situation etc…
Thanx for your comment my friend, Subramoneyplanning blog was created to help guys like you to learn more about money planning & financial planning in simple manner...
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