Chapter 4.7: What should a financial plan include?

Now that we have gone through the whats and whys of a financial plan, let’s get down to business – how to actually make a financial plan. Depending upon an individual's needs and wants, a financial plan should include various components.

It should include everything, which helps in the attainment of your financial goals in the most efficient manner. Some things might have precedence over the others, but anything that even remotely affects your goals should be considered.

A financial plan differs from individual to individual, as something important for one may not be important for others. However, broadly, we can say that it should include the following activities:

How to Undertake Financial Planning By Kotak Securities®
  • Assessing present:
    This part of the planning has to deal with taking stock of all the assets and resources you own currently. This helps you understand your current financial situation. It is the most important thing to do while doing financial planning.

    As this is the starting point, utmost care should care should taken while assessing the present situation.

  • Determining constraints:
    Everyone has some limitation or the other. These could be because of familial responsibilities, lack of access, government regulation and so on.

    These need to be taken into consideration while forming your financial plan. Determine constraints in financial planning areas like taxes, legalities, time horizon, liquidity, risk appetite and obligations. There may also be unique circumstances that differ from person to person that should be taken into consideration.

    For example, you may want to avoid companies making tobacco or alcohol for ethical reasons. This is a unique constraint. Nonetheless, it should be taken into account before designing a plan.

  • Evaluating the plan regularly:
    A financial planning is a dynamic process and not a static one. This is because individual circumstances keep on changing. For example, 10 years ago when you made the plan, you had no monthly loan liabilities. Today, you have to spend almost Rs 40,000 in installments alone.

    This changes your liquidity constraints and requirements. For this reason, your financial plan should be evaluated on a timely basis.

  • Setting objectives or goals
    Now that you have your starting point, figure out your ending point – set your goals and objectives. This should be both in terms of the return you expect on your strategies and investments as well as the risk you are willing to take. That said, remember that a financial plan can consist of multiple goals of varying durations.

    For example, your short-term goal may be buying a car or going on a month-long Europe trip, while your long-term goal may be to have a retirement corpus of Rs 100 crore. However, be realistic. Do not have a goal that is too far-fetched.

    Design your goals on the basis of your current situation and desired future conditions. Since there can be multiple goals, prioritization is also important. This can be done on the basis of time, urgency and sheer importance.

  • Determining appropriate plan and strategy:
    After analyzing the goals and constraints, various alternative strategies are designed. Compare these and find out the pros and cons of each plan.

    The best plan – which achieves the goals in the most efficient manner – should be chosen.

  • Adjusting and modifying the plan:
    After evaluating the plan, if a change is required, the plan should be altered keeping in mind your current situation.

    Appropriate modifications are an absolute must.

What next?

Now that we have understood the basics of financial planning and its importance, let’s move on to the actual execution of a financial plan. In the next section, we will look at how to form a financial plan. Click here

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  • Helps compute taxes
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