Financial planning: A beginners guide to personal finance

Everybody has various financial goals in life. The financial planning process helps you identify these financial goals, quantify them, make a goal plan, implement it, and review it till you achieve the goal. This article focuses on some of the steps involved in the financial planning journey.

Wrong financial planning can derail your financial goals

Every individual needs to have a systematic or organised approach towards financial planning and achieving their financial goals. Or else it would be like embarking on a journey with no destination in mind. You can guess how badly such an unplanned trip can go. In a similar vein, imagine if you were to start investing without any financial goals in mind. It's like you don’t know why you are investing, how much or how long to invest, how much to accumulate, etc. 

A financial planning process needs to be followed to invest systematically. This article focuses on what financial planning is, and the steps involved.

What is financial planning?

Financial planning is the process of doing a comprehensive review of your current financial situation and framing a systematic process through a financial plan to achieve various financial goals such as retirement planning and others.

The financial planning process involves the following steps.

Also Read: 7 Pillars Of Financial Planning

Chart: The financial planning process

financial planning process

The above chart shows how the financial planning process involves all the steps, from identifying financial goals to achieving them. Basically, financial planning serves as a beginner’s guide to personal finance.

Financial planning rules

The financial planning process involves following certain rules. These include:

1) Managing your cash flows

The first step to financial planning is managing your cash flows. You should be clear about how much income you earn every month through salary, business income, interest, dividend, rent, etc. At the same time, you should know how much are you spending every month under various expense heads such as groceries, daily use products, garments, children’s school fees, dining out, rent, entertainment, etc.

You can prepare a monthly cash flow statement to record all the cash inflows on one side and cash outflows on the other. If the inflows are higher than the outflows, your cash flow situation is positive, and you can invest your money towards financial goals. If your cash outflows are higher than inflows, you need to work towards reducing your expenses. A monthly cash flow statement will help you in money management.

Also Read: Financial Planning: When You're Single Vs When You're In A Relationship

2) Calculation of net worth

Along with making a cash flow statement, you also need to make a net worth statement. The net worth statement will record all the things you own on the asset side and all the things you owe to others on the liability side. If your assets are more than your liabilities, your net worth will be positive. If your liabilities are more than your assets, your net worth will be negative. This is not good, and you will need to work on your debt management and bring it under control.

3) Building and maintaining an emergency fund

Before starting your personal investment journey, you need to build and maintain an emergency fund. It should be equivalent to 3-6 months of your monthly income. An emergency fund is required in situations like medical emergency, job loss, delay in salary, temporary salary cut (which many people faced during the COVID-19 pandemic), etc.

4) Having adequate life and health insurance

Once the emergency fund is in place, you should focus on life and health insurance. All family breadwinners should have a term insurance policy. Calculate an appropriate cover based on your financial goals and liabilities. All the members of the family should be covered through a family floater health insurance plan.

5) Creating and implementing a financial plan for all goals

Once life and health insurance are in place, you can focus on savings and investment. You should sit with your financial planner and identify your financial goals, quantify them, make a financial plan for each goal, implement it, and review it regularly till the goal is achieved. You may consider working with one of the fee-only financial planners as they don’t have tie-ups with any insurance company or mutual fund house. You can start a systematic investment plan (SIP) for your mutual fund investments.

6) Making the best possible use of tax deductions

When investing for your financial goals, you should make sure they are tax-efficient. You should make the best possible use of tax deductions for things like investments in PPF or Equity Linked Savings Scheme (ELSS) under Section 80C, health insurance under Section 80D, home loan interest under Section 24, etc.

7) Estate planning

When you are creating assets, you need to do estate planning so that there is a smooth transfer of these assets to your legal heir(s) in the event of your untimely death. To start with, you should do a nomination for all your assets. However, this is not enough. A nominee is merely a caretaker of the assets. You need to make a will to ensure a smooth transfer of your assets after your death.


Comprehensive financial planning helps you plan for all your financial goals systematically. It starts with making a cash flow statement and a net worth statement that gives you a true picture of your cash inflows and outflows and your assets and liabilities. You then need to build and maintain an emergency fund. The next step is to buy adequate life insurance for all the family breadwinners and health insurance for all family members. 

After this, you can create and implement a financial plan for all your financial goals. While investing, ensure that you avail of all the tax deductions. Finally, when you are creating assets, you need to make sure you have done estate planning for their smooth transfer to your heir(s). Comprehensive financial planning ensures that you achieve all your financial goals.


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