Skip to content

Building a Financial Plan in 5 Simple Steps

  • by
Financial Plan in 5 Simple Steps

Financial Plan in 5 Simple Steps


Financial planning is the process of meeting your life goals by properly managing your finances. Life goals can include buying a home, saving for your child’s education or planning for retirement. While embarking on a journey to achieve your financial objectives, it is necessary to prioritize amongst them. Making investments in a haphazard manner may not yield the desired results. Any investment choice should ideally depend upon one’s own profile and requirements.


Step 1- What’s my Current Net Worth?

The first thing that you have to do when you sit down to make a financial plan is to list out all your investments across the various asset classes – debt, equity, gold and property. Whether you own Fixed Deposits, Mutual Funds, PPF, Gold, Property etc. they will all come under these.

Once you calculate this amount, just reduce any outstanding loans to arrive at your Net Worth. Here I must point out that the house you stay in should not be treated as an investment but should be taken as a Fixed Asset only.

This figure that you finally arrive at gives you a reality check of where you stand and whether you have a diversified investment portfolio or not. You might even get a jolt and realize that you are over exposed to a particular asset class. In India generally we are over invested in debt and property and under invested in equity.


Step 2- What are my Goals?

Now you must list down all the various goals ahead of you. Whether they are short term goals like the purchase of a new car, an International vacation etc. or long term like Children’s education, their marriage, retirement etc.


Step 3- How much money do I need and when?

Now that you know your goals you must also list down the expected cost and a timeline when the goals have to be achieved. An amount of Rs 10 lakh required today for college education of your child would get converted to Rs 20 lakhs in 10 years, assuming inflation at 7%.


Step 4- How much risk can I take?

Every person has a different risk profile. A young adult of 30 years can very afford to take a higher risk by having an Equity allocation of 70% because he has nearly 30 more years of working and to continue investing. So even if the markets go substantially lower he can afford to keep investing through SIPs. However, someone who is more than 60 years old should not take so much risk and should keep his Equity allocation between 30-40% only.

You have to factor in whether you are a single or multiple income household, the number of dependants you support, what your outstanding loans are etc.

Only once you weigh all the above factors can you decide what your Risk Profile should be.


Step 5- Where should I Invest?

Always try to have a diversified portfolio. There should be a good mix of Debt products like PPF, Debt mutual funds, Fixed deposits, Tax free bonds etc. For exposure in Equity- TRY investing in mutual funds through SIP route. Always have an emergency fund equivalent to 3-6 month’s expenses readily accessible in a Liquid / Short term debt fund. Some exposure of 5-10 % can be taken in Gold also. Property should also be included in your portfolio at some stage but should never be more than 30-35% of your portfolio.

Once you have decided on an Asset Allocation for yourself just try and rebalance it every six month’s or so and you will be set on the Road to Financial Freedom. In case you find the above task too daunting, do not hesitate to utilize the services of a Financial Advisor to chalk out your investment strategy.

Investing is a long game requiring patience, planning, competence and discipline.