How to build a robust financial plan?

You can handle your expenses better, get more out of your investments, and secure your financial future if you have a sound financial plan.

A robust financial plan is one that allows you to prosper during good times and manage to tide over difficult times. It should consider all elements of your financial life, from cash flow to expenses, and tax-saving investments to debts, and define the strategies that help you achieve your financial targets. No matter how large or small your income, follow these simple steps to build a robust financial plan in your life.

Setting the goals

It seems like a trivial formality when the captains of rival football teams toss a coin to decide which goal post they would shoot for. But it is the basic premise on which the match is played. The same is true of financial planning. With clear financial goals in mind, you won’t need to huff and puff aimlessly with your savings, expenses, and retirement plans. You have to set objectives that you seek to achieve during (and by the end of) your active life. Then you have to assign a monetary value to your goal and decide on a time frame. The objectives of financial planning should be ambitious yet realistic so that you can achieve them with consistent financial discipline. 

Chart your path to the goal 

Your goals may be short-term, medium-term, or long-term. Buying a car or going abroad for a vacation would be a short-term goal, while saving for your children’s higher education can be considered a medium-term objective. Planning your retirement corpus, on the other hand, should be a long-term goal in your life. Separating your goals into different time horizons will bring more clarity to your to-do list and help you plan for them better.

Related: 7 Pillars of financial planning

Design and stick to a budget 

Based on your regular income and expense flows, you should prepare a financial budget. You will allocate the various regular expenses, savings, investments and loan repayments in the budget, and ensure that they stay within the income flow. A typical budget may look like the table below:

However, the actual percentage may vary depending on the cost of living in your area.

The basics of investing 

It is apparent that a portion of your income must be diverted towards savings and investments. Always diversify your savings and investments across asset classes so that your risk is balanced. With too much fixed-income investment, you could lose out on market growth and inflation, while heavy investment in equities can leave you exposed to market risks. Leaving a portion in cash or a cash equivalent such as a savings account would come in handy to meet any unforeseen emergencies or cash shortage. 

Popular investment options include safe investments like fixed deposits and public provident fund, which pay out a guaranteed income. On the other hand, share investment and equity mutual funds are responsive to the changes in the market and are two popular market-linked investment options.

Retirement planning

Where would your financial plan be without a robust retirement strategy? Look at long-term saving options that offer a good interest rate so that the power of compounding elevates your small and regular contributions to a sizeable amount. Estimating your post-retirement needs is a separate and crucial exercise in itself. Your lifestyle, liabilities, alternative cash inflows etc. have to be considered before you can arrive at an amount that is adequate for you to lead a financially secure post-retirement life. 

Retirement planning doesn’t necessarily only mean your financial independence. An adequate life insurance policy ensures that your family is financially independent in the unfortunate event of your untimely demise. Getting yourself, your family, your health, and your assets insured should be an important part of the financial planning process.

Related: Why ignoring to plan for retirement can be financially damaging

Tax planning

As your income grows, so will your tax liability. You should know how to save money from salary by investing your income wisely. There are various tax-saving investments you can use to claim deductions and reduce your tax liability. You should consult a tax expert or understand the Income Tax benefits well enough to plan your taxes well. For example, you could end up saving taxes on capital gains on the sale of a house or land by reinvesting in notified bonds up to Rs 50 lakh under section 54EC of the Income Tax Act.

Related: Tax planning tips for every age group

Addressing debts and emergencies

High-interest debts can gradually erode your financial worth, while an emergency can deplete it in one go. Be prepared to meet both with a resolute plan. If you have sizeable debts in your budget, work on getting rid of them before anything else. Similarly, set aside a certain amount to tackle emergencies such as a job loss or a health issue. Make sure these things don’t become a nightmare for your finances. 

Related: Tomorrow Makers' Guide To Becoming Debt-Free in 6 Months

Optimising your income

While you may be overly preoccupied with managing our outflows, you should also aim to augment your income by looking at side hustles. Apart from growing your business or increasing your take-home salary, you can look for alternative sources of income such as rental income from property. A steady source of extra income can come in handy in your post-retirement life. Have a hobby? Here’s how to monetise it as a side hustle.

Addressing all aspects of your financial life helps you save more money, earn more from your investments, and build a more secure retired life. At any time, if you feel the need for more specialised assistance, talk to a financial planner or a consultant who can instil more discipline and method into your financial plan. Financial advisor or no financial advisor: How does it make a difference?