How to make your own financial plan

Many people invest in a haphazard manner without a plan. Such random investments are not very useful. ET Wealth tells you how to chalk out a financial plan that can help you reach your goals.

KNOW HOW MUCH YOU CAN INVEST
Find out how much is the investible surplus from your monthly income. Invest at least 10% of your income. Less than 10% means you aren’t saving enough.
Smart tip: Most people save what is left after expenses. Change this to spending what is left after investment.

IDENTIFY YOUR GOALS
Write down the objective why you are saving. Typical goals are retirement, children’s education and marriage, and buying assets such as house, car.
Segregate goals by tenure
Less than 3 years: Short term
4-7 years: Medium term
8-12 years: Long term
Over 12 years: Very long term

PRIORITISE THE GOALS
Decide the importance of goals, depending on importance, time horizon and financial impact on other goals. Critical goals like kid’s education and retirement are non-negotiable. But buying a car or house can be deferred or even dumped if necessary.
Smart tip: Ear-mark separate investments for each goal. This helps track progress for each goal.

CALCULATE FUTURE COSTS
Factor in inflation to know how much different goals will cost at a future date. If college fee is Rs. 6 lakh today, 8% inflation will double it to Rs. 12 lakh in nine years.
Smart tip: Assume average inflation of 7% for retirement needs but 10% for education costs.

ASSESS RISK PROFILE AND ESTABLISH ASSET ALLOCATION
Decide how much risk you are capable of taking and are willing to take with your investments.
Segregate your investments into - Equity, Debt and Gold



CHOOSE INVESTMENT OPTION
Choices should depend on the time available for goal.
Tenure of goals defines the risk and the investment option


Smart tip: If KYC compliant, investing online is very easy for those with debit cards and net banking accounts. Most fund houses also offer eKYC facilities now.

TRACK PORTFOLIO PERFORMANCE
Register with an online portfolio tracker to assess how investments are doing.
Track performance of the investments, but don’t make changes based on short-term movements. Changes should be made once in a year or so.

REBALANCE PORTFOLIO
Review portfolio allocation once a year and rejig if the asset mix has changed significantly.
Portfolio allocation should also change as the goal comes nearer. Reduce the risk by shifting out of volatile assets (equity) to assured returns instruments (fixed income).

BEFORE YOU INVEST
Even the best financial plans can get derailed by unforeseen incidents. Here’s how you can safeguard your financial plan against the unexpected.

Buy sufficient life insurance
Life insurance provides financial support to your family if something untoward happens to you. The cover should be big enough to generate an income for the family, provide for big-ticket expenses as also settle all outstanding loans.

#Rs 12,000 a year for Rs 1 crore cover for a 30 year old for 30 years

Get medical cover
Medical insurance is more important than life insurance because the probability of a family member needing medical care is higher than the death of the breadwinner. Medical care costs are rising very fast and even a 3-4 day stay in a hospital can leave you with a bill of Rs 50,000-60,000. In comparison, medical insurance costs very little.

#Rs 12,000-18,000 a year for a cover of `5 lakh for a family of four.

Buy accident insurance
Life insurance covers you against death and medical insurance pays your hospital bills. But one also needs to cover against injuries that disable, either temporarily or permanently. This cover pays a lump sum in case of death due to accident and provides a monthly income for disability due to a mishap.

#Rs 2,400 a year for a cover of Rs 25 lakh