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Old 04-14-2010, 02:33 PM
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Default How to create a Financial Plan?

A financial plan is more than a wish list. After you've taken the time to express what you want from your financial life, you'll need to create a strategy to help you achieve those goals.

A financial plan is more than a wish list. After youíve taken the time to express what you want from your financial life, youíll need to create a strategy to help you achieve those goals.

One of the challenges is likely to be that various ambitions compete for your attention:
  • Should you be making the down payment on a home or putting extra money into your retirement account?
  • Will taking a vacation mean you have to put plans for buying a car on hold?
  • Does it make sense to use the money you just inherited to start your own business?
  • Set aside funds for your childís higher education?
Working out the ways you can accomplish many goals at the same time may not be easy, but the sense of control and power that making thoughtful decisions can give you will make it worth the effort.
Identifying your goals

Some people know exactly what their financial goals are. And maybe you do, too. Or maybe youíre spending all your energy managing your current financial situation. If thatís the case, it may take a special effort to concentrate on what you think is important for the future. But youíll find itís worth the time to consider the next 5, 20 and 40 years of your life to anticipate where youíd like to be when that time arrives.

There are some goals that most people share: staying out of debt, owning a home and having a secure retirement. Others may be more specific to who you are, such as paying for your childrenís education or starting your own small business.

There are no right answers about what your goals should be ó with the possible exception that most people have to be concerned about affording a financially secure retirement. Thatís why each personís plan is unique.
Some questions to ask

As part of the planning process, youíll want to ask yourself some important questions:
  • Do you have enough cash saved in an emergency fund in case you lose your job or miss work because of an accident or illness?
  • Will you need to support your parents after they retire? Are there other people whoíll need your financial help?
  • Do you hope to buy a home or upgrade to a larger one?
  • Do you have children or plan to? Do you want to plan for their education?
  • At what age do you want to retire?
These questions are only starting points. Youíll need to consider your unique needs, personal situation, and how much time you have to achieve your goals to determine the questions you need to ask Ė and answer. One of the things that may complicate your planning is that you may be starting a family, buying a home or changing careers at a different time in your life than your friends or family did. For example, if your youngest child will graduates in the year you could take early retirement, your situation is different from someone who never had children or who had them very young.
Saving for your goals

Once youíve established your financial goals and their time frames, you need to decide how you can accumulate the money to realize them. Short of working around the clock, there are two possible ways to increase your wealth: saving and investing. Youíll probably want to do some of both.

Saving, which means setting aside money for the future, may be the hardest part of financial planning, since youíll have less to spend on your current needs than you do now. But making regular additions to a savings account is the surest way to move forward toward your goals.

Ideally, youíll be able to save 10% or more of your pretax income. On an income of Rs 50,000, thatís Rs 5,000 per year, or Rs 417 each month.
Investing, which means putting money into assets like stocks, bonds and mutual funds, can help you earn more on what youíve already saved than simply leaving it in a savings account. Thatís because the return on most investments averages more over time than the return on savings accounts.

The catch is that making any kind of investment means taking a risk that you could lose some of your principal, especially in the short term. But not investing carries risks too because money thatís not earning more than the rate of inflation loses its buying power and can leave you short of your goals.

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