7 Best Steps to Creating a Smart Financial Plan

7 Best Steps to Creating a Smart Financial Plan

We face several hurdles when it comes to creating a smart and workable financial plan. Questions arise about how to start, where to start and what to do, and facing those questions can be scary.

But, if you are focused and disciplined, arriving at the financial plan that 

works for you won’t be a challenge.

So, here are some checks that will help you arrive at a smart financial plan.

Check#1: Track and Budget

To know where exactly your money goes, you need to track every single penny. Budgeting helps you attach a purpose to every single penny you earn and will put you in control. 

Although a budget can seem to be quite a bit of work, it is essential for achieving both long and short-term goals.

Many methods help you in budgeting like:

1.    The envelope method: Where you set aside an amount for your every single expense.

2.    Notebook: Carry a notebook with you and note down the expenses you make for the day. Alternatively, you can also jot the expenditures of the week by attaching the charge slips and bills to the page.

3.    Apps: There are dedicated apps that help you in recording and tracking your spending and monthly bills.

Once you have recorded three month’s expenses, go through it and see where your money actually goes. Be sure to include the costs that don’t recur as well, like insurance renewal, car repairs, and so on.

Check#2: Eradicate your debts

In case you have a lot of debts like loans and credit card bills, then it is a smart move to pay it off. This is crucial to a smart financial plan as it makes no sense to have a one when you are knee-deep in debt. It is possible to get out of your existing financial obligations with a little discipline.

However, if you have a lot of debt (other than your home loan), then you need to cut back drastically on your spending. By curbing your surplus expenses, it will become easier for you to pay back your debts. 

You can also try consolidating all your debts into one single loan and EMI payment. Once you are out of your debts, it is time to set up systems that would prevent you from becoming a borrower again.

Check#3: Set Financial Goals

Once your debts are out of the picture, and you have tracked all your spendings, now is the time to ask yourself some fundamental questions:

1.   Where do I want to be 10 years, 15 years or 20 years from now?

2.   What are my long-term financial goals? (ex. Children's college fund, retirement plan)

3.   What are my short-term goals? (Ex. Car, home, travel)

While answering these questions, be as specific as you can and realistic.  You want to achieve your financial goals, and you can do that only when you have attainable, realistic goals.

Check#4: Set aside for rainy days

Life is always about expecting the unexpected, so having an emergency fund and being well-insured should be part and parcel of your financial plan.

Once you are out of debt and have created a budget, it is time to set aside an emergency fund. You need to have a minimum of six months of savings that can cover your necessary expenditures in case you fall on hard times. 

Additionally, this will also stop you from plundering your investments.

Make sure you and your family are well-covered by insurance. Adequate health insurance, life insurance, automobile insurance, and others should be part of your financial plan.

Check#5: Start Saving:

One of the primary keys to a robust financial plan is not only your income but also your expenditure. Even if you earn more, you would not be able to save, if you don’t control your outflow.

After looking at your budget, find where you might be spending too much. 

Is it entertainment, mortagage, vacations, or food?

Look for loopholes where you can save money; at the same time, don’t restrict yourself too much. 

Your goal is not to curb your guilty pleasures, but to keep them from spiraling out of your hand. This control will help you free some of your income for savings, Eg. fixed deposit.  Put this money aside and don’t use it unless it is a case of a severe emergency.

Check#6: Have an investment portfolio:

More than a savings account, it is the investments that make your life financially comfortable. But make sure the investment you are choosing aligns with your risk appetite, financial goal, and ease of payments.

Also, do thorough research before you invest. Understand the risk and reward role, where the higher the risk, the higher the reward prevails, and vice versa. Diversify your portfolio to balance your risk and rewards. In case you do not have any time for research, you can invest in mutual funds

Check#7: Monitor your plan’s progress:

While setting a smart financial plan is the first step, the next one is to monitor its progress on a regular basis.  Ensure that you can answer the following questions:

1.    Are your goals are on the progress of getting fulfilled?

2.   Check whether there are any changes in your income, debt or familial status

3.   How are your investments performing?

Depending on your current situation, it will make sense to review your investments every six months or every year. If, when doing these reviews, don’t confuse your long-term investment ups and downs with short-term market fluctuation.

Make every decision after carefully considering all the facets of the investment. 

Arriving at a financial plan suitable to your requirements takes some time, but it is well worth the effort. It helps you stay clear of any curveball that life may throw at you. 

No matter the external circumstances, if you have set up a smart financial plan, you have set yourself for financial success.

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