A good financial plan is a necessary requirement to generate wealth and attain your goals in life. Though several investors have the knack and understanding of the importance of investing, not all realise the importance of creating a good financial plan. A good financial plan can be the deciding factor in you achieving your objectives. So, you wouldn’t want to miss out on it. This article focusses on important steps to create a good financial plan for your portfolio:
Steps to create a financial plan:
Following are five simple steps to create a sound financial plan for your portfolio:
- Analyse your current financial position
The first and foremost step towards creating a sound financial plan is analysing your financial situation at the moment. This includes tracking your expenses, debts, savings, and income levels. Do this practice for at least few months to get a clear picture of your financial condition. - Jot down your financial objectives
Understanding your financial objectives is the foundation of drafting a financial plan. Most investors invest for the sake of investing without having any particular objective in mind. It’s like going on a trip without having any destination in mind. Investors must ensure that their financial goals are SMART, i.e. Specific, Measurable, Achievable, Realistic, and Time-bound. You may also want to prioritise these objectives in the order of high priority to low. This will help you to allocate funds against each goal in the future. You have successfully moved an inch closer to realizing your goals. - Draft a financial plan
The next step in financial planning includes creating an action plan to achieve your financial objectives. A good financial plan is that which controls your investment strategy and successfully mirrors your goals. This step is divided into 3 sub-steps, namely:
- Connecting your existing assets to your goals
- Connecting your present and future probable savings to your financial objectives
- Generating alternate investment options
4. Evaluate your alternatives
Once you have drafted a financial plan strategy for yourself, you need to find the right type of investment for each objective. To do this you must be well-informed about the various investment options that are offered to investors. Some of the common types of investment include:
- Equities and equity-related securities
- Fixed-income securities
- Crypto currencies
- Insurance
- Small savings scheme
- Precious metals such as gold
- Real estate
Before choosing the right type of investment for their portfolio, an investor must ensure that the investment objective of the fund is in line with the investment objective of the portfolio. In essence, their investments must align with their financial goals, risk profile, and investment horizon.
5. Implement your financial strategy
Finally, an investor needs to implement the plan they have created. If you have reached till this step, you have probably come a long way. And don’t worry, all your efforts and hard work will be rewarded in the form of substantial returns on your portfolio.
Creating a financial plan is not that difficult. Once you have figured your risk profile, financial goals, and investment horizon to achieve those goals, the next steps just fall in place. Note that, while creating a financial plan is important, being prepared for any type of emergencies in equally important so that you do not dip into your savings during any unforeseen circumstances. Hence, you must have an emergency fund, health plan, and insurance policy (in case you have financial dependents) in place. Also, your part as an investor does not simply end at investing. You must constantly and regularly track your investments and your portfolio. Happy investing!