Processes to follow

1. Write your goals and be specific:

When you write your financial goals it will help you to visualize them. It should be specific and realistic.

2. Identify your time-specific goals:

Short -Term Goals: The goals which you want to achieve within 1 year,
Medium–Term Goals: You want to achieve these goals within 5 years.
Long–Term Goals: Goals that you want to achieve after 5 years.
Priority. After listing your Financial Goals, it’s time to number them according to your priority.

3. Analysis of your Current Financial Situation

Cash Flow Statement: It will give you the full information of your income and expenditure. Net Worth is an overall statement of your assets and liabilities

Net Worth = Asset – Liabilities

Both the Cash Flow and Net worth Statements will give you a real picture of your present situation and help you
make realistic financial goals.

4. Update it regularly.

These two vital documents do not replace each other; but they are supportive documents to each other. Budgeting In financial planning, budgeting plays a very vital and important part. Budgeting will give you the exact picture of your expenses and spending habits.
This will help you to plan your expenses and spending habits more efficiently. If you do not know where you are spending your money just keep a track on your spending habits on a monthly basis.

5. Set-up a plan towards your financial goals.

Now you know your needs, your time frame and resources to reach your financial goals. All these informations are crucial. Without the above steps it is really impossible to set up a plan. Now it’s time to implement the plan.

Categories of Financial Goals

6. Protection:

The main purpose of insurance is to provide protection against any unseen eventuality or financial replacement. So you need adequate Life, Disability, Accidental, Hospitalization and Critical Illness Insurance. Without proper protection, your whole financial plan is at risk, because it is the foundation of the Financial Pyramid. Can you build your dream house in a weak foundation? What types of Protection do my family and I need?

Life Insurance:

The purpose is to maintain at least normal life style in your absence. So you need to have right amount of protection for your family. Always remember that life insurance is never an investment or tax-saving instrument.

Health Insurance:

It will take care of you and your family’s hospitalization cost at the time of any medical emergency otherwise you have to pay from your savings or you have to borrow from someone for which your financial planning might get hampered. It is also advisable to go for an annual health check-up for your family.

7. Emergency OR Contingency Fund:

In financial planning after protection Emergency Fund plays an important role. The purpose of it is to help you in your bad time, so don’t touch it without an absolute emergency. Keep minimum 3 months expenses in emergency fund.

8. Investment Choices:

Investor can create wealth through investment. Two types of investments are available: Guaranteed Return Investment & Non-Guaranteed Return

The two asset categories have the following characteristics.

Guaranteed Return Investment – These schemes offer guaranteed return with very low risk and liquidity which varies from high to low. The main purpose of these schemes is to provide a fixed regular earning. Generally guaranteed schemes do not beat inflation.

It’s a real concern for those who totally depend on guaranteed schemes as the returns gradually decreases. Non-Guaranteed Return Investment – These schemes offer high returns with low risk in long-term and high risk in short term. Wealth creation is only possible through Non-Guaranteed Return Investment because most of the time it beats inflation. Among the asset categories, Equity have historically had the highest returns in case of long term investment horizon.

9. Asset Allocation :

Asset allocation means distributing your investment in different asset classes like equity, gold, debt, and cash. There is no single asset which offers positive real returns under all conditions. Your Asset allocation depends on the following:

I)Time Horizon

It means when you require money for your particular goal. It may be short, mid and long term horizon. Without time horizon, Financial Planning is really impossible.

II) Expected Rate of Return :

Expected Rate of Return on investment will play crucial role in deciding which asset class to invest & percentage allocation to difference assets.

III) Risk Appetite

It means how much financial loss you can manage for time being, say few months or years, to achieve your particular goal. It is only applicable for non-guaranteed investment. It is very rare that long term horizon investors lose their money in non-guaranteed investment.

• Based on risk appetite, the investors can be classified into three categories

• Conservative,

• Moderate

• Aggressive.

• Different Life Stages – Each and every life stages have different goals and liabilities. A young person with less/no dependents and liabilities have different goals, rather than a person with dependents and liabilities.

• Past Experience – Every individual have their own past investment experience in different asset class and this experience plays a vital role for future investment plan.

• Net Worth – A positive net worth person’s asset allocation will be different from a negative or equal net worth person.

Importance of Asset Allocation

• Asset allocation is like Balanced Diet. Without Balanced Diet we can’t live healthy. Without Asset allocation it’s really tough to achieve financial goal.

• What asset allocation is best for me? There is no specific answer for this. Each and every individual have different Asset Allocation based on their time horizon, risk appetite, different life stage, past experience and net worth.

• Please remember no Asset Allocation strategy is fixed for life, it’s a changing process based on your current situation

10. Rebalancing of Portfolio

It’s the ultimate art and science of wealth creation. Rebalancing is the periodic adjustment of your portfolio to protect your current gain with effective risk management to achieve your financial goal. Why is rebalancing important to my asset allocation? The market may move up and down in different situations, which is quite natural. The main reason for rebalancing is to protect the current equity valuation when the market rise and buy equity when the market fall based on the market conditions. If you apply this strategy, you might achieve your goal before the actual time. Rebalancing your portfolio on a regular basis maintains the desired return in your investment strategy – it is one of the important key for effective risk management.

Processes to follow