A five step financial plan guide for beginners

A Five Step Financial Planning Guide for Beginners

Different people have varying beliefs about Financial Planning. Everyone talks about what works for them.

But, what is the actual financial planning process?

It is unfortunate that though money is absolutely essential in everybody’s life, still financial literacy is not being taught in our school system! As a result, Financial IQ doesn’t develop and people fail to plan their finances.

For rigid financial planning, you need to have good financial IQ. According to Robert Kiyosaki, the Financial IQ covers the important factors such as: Protecting your Money, Budgeting your money and leveraging your money.

How do you rate yourself in your financial IQ?

Do you know… how to budget your money like a smart-saver?

Do you know… how to leverage your money in the best possible way?

If not!! This post will help you figure it out.

In this post, we will discuss financial planning in a comprehensive and step by step manner that will allow you to get a sound idea about all major Financial Planning steps.


Step 1: Having Financial Goals- Your first step towards Financial Planning

The very first step towards

Financial Planning is having your FINANCIAL GOALS in order.

Now let’s discuss how to create your financial goals?

Below are the 6-Steps to create your Financial Goals:

1. Figure out what really matters to you?

Gather everything in a place that you can think of doing. Write down all your needs and wants. A typical list will look, this way:

  • Planning a trip abroad with family.
  • Saving for children’s higher education in the US University.
  • Getting a new BMW car.
  • Getting a new home near the beach.
  • Saving for children’s marriage.

And, so forth. Write whatever you can think of doing.

2. Separate out the list of all your needs and wants.

For example, there are needs that are compulsory for you to achieve, such as, saving for your children’s education and marriage or saving for your retirement.

However, your wants can be postponed or even neglected for a short time, such as, your plan of abroad trip or getting a new BMW car.

First things first.

3. Apply SMART Financial Goal Strategy:

SMART stands for Specific, Measurable, Attainable, Relevant, and Time-bounded. Let’s take an example if your financial goal is:

“Getting your new home near the beach.”

After applying the SMART Financial Goal strategy, your financial goal will become:

“Getting a new 3 BHK Home at Santhome area near the beach, worth Rs. 3.5 crores in 8 years from now.”

This financial goal is:

Specific: As you have specified the area (Santhome), and your choice of home (3BHK)

Measurable: Cost is clearly defined as Rs. 3.5 crores.

Attainable: If you are able to save nothing less than Rs. 35 lakhs per annum, assuming the return of your Investment is at the rate of 12%.

Relevant: If your financial goal aligns with your dream and desired lifestyle, then it is a relevant financial goal. Your financial goal is relevant, if you want to settle down in Chennai in the future. But let’s say, it’s your desire to move to Australia or the US to live near better beaches then this financial goal becomes irrelevant!

Time Bound: Since the duration to achieve this financial goal is mentioned as 8 years, it is time-bound. Also, it is better to specify a date. For eg. If you are creating this financial goal on 30th January 2020, then you should be able to achieve this goal on 30th January 2028. Now, mark 30th January 2028 as an important date to achieve your financial goal.

4. Categorize your financial goals into Short Term, Middle Term, and Long Term Financial Goals.

After short-listing your financial goals from your financial goal list (of needs and wants) and transforming them into SMART Financial Goals, you need to categorise your financial goals.

Short term financial goal includes all your financial goals which take less than 5 years to achieve them. Such as,

  • Paying-off your Credit card debt,
  • Saving for emergency funds,
  • Revamping your house,
  • Purchasing a new home-theatre system, and so on.

Mid-Term financial goals are within the time duration of 5-7 years. Such as,

  • Paying off all the existing loans, such as education loan and all personal loans.
  • Buying your first home.
  • Saving for your daughter’s marriage. And, so forth.

Long term financial goals are your major financial goals which take beyond 7 years.
For example:

  • Estimating your retirement needs.
  • Attaining your financial independence goal.
  • Buying your dream home in the city of your choice.

5. Create a realistic budget to all your short, middle and long-term financial goals.

You have already defined your amount for your SMART financial goals. So, you may want to take the Financial Planner’s advice to create your budget more realistically and, contribute saving for your top financial goals.

6. Continuously monitor your progress while achieving your Financial Goals.

Nothing great was ever accomplished without enthusiasm. Keep reviewing the progress of your financial goals each month, each year and make sure that you are making the desired progress.

Now, let’s learn about financial planning in more detail.

Step-2: Creating your personal Balance-Sheet and defining your Net-Worth

If you have read the all-time international best-selling book in finance called “Rich Dad, Poor Dad”, you might have seen the financial statement chart, categorized in “Income Statement” and “Balance Sheet”.

Let’s define the Income Statement and Balance Sheet:

Income Statement = Income + Expenses

Income Expenses
Rental Income,
Interests, etc.
taxes, and
all living expenses
Above chart shows the Income Statement.

Income consists of your salary, rental Income, interest, etc. and expenses include rent, food, taxes, and all living expenses.

The difference between Income and expenses leads to savings

Income – Expenses = Savings

Savings can be useful in building your Assets in the Balance Sheet, as shown in the table below:

Balance Sheet = Assets + Liabilities

Assets Liabilities
Mutual Funds,
Real Estate,
Gold, etc.
Credit card loan,
Car Loan,
Education loan, etc.
The balance sheet consists of all Assets and Liabilities.

Assets are useful in generating income through interest earned by stocks, bonds, Mutual Funds, Real Estate, Gold, etc.

Liabilities are loans which you have to pay with defined interest rate.

The difference between Assets and Liabilities defines Net Worth.

Assets – Liabilities = Net Worth

How to increase your net worth??

Net Worth can be increased by building a list of assets in your balance sheet.

Building a list of assets is possible by having a good savings in your income statement.

Once, the assets are built, they can contribute to the income statement by generating more income through interests.

Financial Planning Process: Steps in building High Net Worth

Therefore, savings helps you to build Assets. And, assets define your Net-Worth after paying off all liabilities.

In other words, the Income Statement helps to build your Balance Sheet and vice-versa.

Asset Allocation

Financial Planning will help you to build your personalized list of assets.

Asset allocation in-line with financial goals defines rigid Financial Planning of any duration; short-term or long term.

Let’s have an overview of various financial assets:

    1. Equity: Stocks and Mutual Funds
    2. Debt: PPF, FDs, LIC Policies
    3. Liquid: Saving Bank account or Current Account or liquid funds

Investing wisely on above financial assets can build your powerful Balance Sheet.

Read the post on the Secrets of Successful Asset Allocation, for more information on Assets.

In order to have a high net-worth, you need to have good financial assets with you.

Riches are never measured by their income, they are measured by Net-Worth. Higher is your Net-Worth, richer you are.

Now, with this understanding let’s formulate your existing Income Statement and Balance Sheet.

After forming your goals, it will be your next MAJOR step towards Financial Planning process.

Your next step is to understand the core features of the Financial Planning process.

In the next sections, let’s dig deeper to understand the core features of the Financial Planning Process.

Step-3: Understanding the core features of the Financial Planning process

As discussed at the beginning of this post regarding the Financial IQ factors, the Financial Planning process can help you to strengthen all these factors.

A good Financial Planning will also help you to develop excellent financial future for you and your family.

Now, let us understand the core features of the Financial Planning Process:

1. Planning for retirement

Retirement planning is the most important financial planning these days. Below are some reasons for you to consider Retirement Planning seriously:

  • Work Life is shrinking as compared to the earlier generation.
    Previously, people start working at the age of 20 and retire at the age of 60-65. Now, due to higher education and other factors, work-life starts at 22-25 and people want to retire at the age of 50-55, therefore work life is reducing to 25-30 years as compared to the old working days of 40-45 long years.
  • Increased Life-Span,
    Nowadays lifespan is increasing due to the development of the healthcare sector.
    Previously life expectancy was 70 years and now life expectancy is increasing to 85-90 years. Therefore a good retirement plan is required to live 25-30 years after retirement.
  • Lack of social security.
    There was a time where workplaces used to provide pensions. But now due to our increased population, even government organizations are motivating their employees to invest in their own pension scheme through NPS or other similar schemes. Therefore a rigid investment plan is becoming inevitable.
  • Lack of saving rate.
    People of age-group between 40-60 saves around 20-30%, but the age group of 15-35 merely saves 10-15%.
  • Growing Nuclear family structure.
    Nowadays people cannot depend on their children, as people are choosing to live an independent life. Therefore, it is useful for you to plan your long term finances including retirement.
  • Interest rates are going down.
    Each year due to fall in interest rates, it is becoming difficult to choose the right scheme for retirement. FDs or similar scheme from the Bank or Post Office can no longer serve the purpose. Therefore, you need to move your investments towards other assets where interest rates are higher.

Power of compounding works magically for a longer time frame.

A financial planner will help you plan your retirement corpus and can also suggest the right schemes to invest in for richer retirement.

Initially, you may always feel like that it is not the right time to plan for retirement.
But the truth is earlier you save for retirement, the richer you will retire.
Read more information on How to Invest your Retirement Corpus.

2. Risk Coverage and Insurance advice

There are always some risks involved with your property or life. Such risk may cause financial jeopardy to you and your dependents.

Let’s say if you are on your way to a long journey with your car to your nearby hill station. How will you prepare for such a journey?

Surely, you will check all the maintenance equipment required for your car such as fuel level, stepney wheel, condition of the engine and so on, also you will take some food and necessary travel kit for yourself to sustain that long journey.

Therefore, in order to sustain financial risks, it is wise to be properly insured. There are some compulsory insurances that cannot be neglected such as:

  • Term life insurance,
  • Health insurance
  • Accidental insurance
  • Property Insurance

A good financial planner will suggest you a suitable insurance plan for you with a good track record.

3. Planning your taxes

There are good options available where you can plan and save your taxes. Below are some commonly known legitimate ways to save your taxes:

  • By making an investment of Rs. 1.5 lacs in schemes like PPF, Bank FDs, National Saving Certificate, National Pension Scheme and through investments made in Equity Linked Saving Scheme (ELSS) funds.
  • You can buy medical insurance and claim a deduction up to Rs. 50,000 for medical insurance premium.
  • A home loan can also help you to get your taxable income reduced.

Also, there are some less known methods to save taxes.

For e.g., If you are investing in a long term investment plan and by the time you plan to withdraw, your returns are bound for taxes. Therefore choosing the plans which can save tax value upon maturity can have significant tax benefits.

Also, it is a better idea to consult your Financial Planner to plan your taxes in the most efficient way.

4. Creating a personal Investment portfolio

Building the financial goal focused portfolio is your first step towards Financial Freedom. It involves diversifying your investments amongst various asset classes such as equity, debt or cash.

You need to diversify your portfolio based on your various long term and short term financial goal. It is not advisable to put all the eggs in one basket or to invest everything in a single asset class. Our recommendation is to invest in Mutual Funds, below is the basic investment guideline for you to consider in your investments:

Duration Suggested Investment
0-3 years Debt Funds
3-5 years Hybrid Funds (Equity+Debt)
5 + years 5 + years

Your financial advisor will help you to build your ideal portfolio. You must consider taking his advice for your personalized financial plans.

Read this article on investment in various asset classes.

5. Understanding essential Financial Thumb Rules

Financial Planning will help you to save money and plan all your finances in the most optimum ways.

Now let’s have a look at some thumb rules of money management, it will help you to make quick calculations, which are commonly used.

Rule of 72:

To understand the Rule of 72. Follow the process step by step.

  • Find out the percentage rate of interest (eg. 7.5%, 8.5%, 10% or 12%, etc.) of your investment.
  • Divide 72 with the above rate of interest. For eg. Let’s say your percentage rate of interest is 10%, then 72/10=7.2.
  • You will get a number which denotes the number of years in which your income will double. In the above case, if the interest rate is 10%, then your income will double in 7.2 years.

This way, the rule of 72 provides a good estimate of returns with a simple calculation.

50-20-30 rule:

If you are trying to figure out how much to save and spend each month. 50-20-30 rule will help you to get started. This rule suggests that:

  • 50% of your income should go toward your basic NEEDS like living expenses.
  • 20% towards SAVINGS for your short, medium and long term financial goals. And,
  • 30% is allocated for spending towants WANTS, including outing, food, and travel.

Now after getting familiar with this allocation. You can follow the same percentages or you are free to tweak the percentages according to age, circumstances, etc.

20/4/10 Rule:

If you are buying a new car, this rule will keep your finances under control.

  • 20 stands for as your 20% down payment of the car price amount paid by you.
  • 4 stands for the number of years of financing and
  • 10 stands for the ideal percentage of your net salary that should go towards car loan EMIs.

You can tweak your numbers as per your requirement. These simple methods can serve as a basic thumb rule to follow in investments.

Step-4: Determine whether you require your Financial Planning advice from a Certified Financial Planner? Take this Quiz

Answer the below 15 questions. If you are confidently able to answer more than 10 questions, then you can manage your finances by yourself and you don’t actually need a Financial Planner.

But if you are not comfortable to answer a minimum of 10 questions, then you need a financial planner.

Let’s find it out:

    1. Are you making the right investments in the right assets?

    2. Is your portfolio properly diversified?

    3. Which investments are better and make you achieve your goals faster?

    4. How much money do you need to save for your retirement?

    5. What retirement schemes you should be using to achieve your retirement goal?

    6. Can you afford your new dream house? How long will you take to get a dream home for your family?

    7. Do you have the right mortgage for your home loan?

    8. Are you properly insured? (Example- life insurance, health insurance, property insurance, etc.)

    9. Do you have an emergency fund?

    10. How much should you be saving to achieve all your financial goals?

    11. How can you save for higher education for your children?

    12. How can you beat inflation in current time?

    13. What can you do to reduce your tax liabilities?

    14. Will a certain investment cause you to owe more taxes?

    15. What taxes will you owe in the event you need to take money out of certain retirement or investment accounts?

So, what’s your SCORE?

Are you able to answer at least 10 of the above questions?

Give yourself 1 point on each answer you can give confidently.

If your score is 15, you are good to go with your existing financial planning.

But, If your score is anywhere below 10, YOU NEED A FINANCIAL PLANNER!

You have to take this important decision to elevate your financial life.

Step-5: Rules of financial planning to avoid major pitfalls and mistakes

1. Wisely planning your Debt

Liabilities in your balance sheet will cause your debt to grow. Such mismanagement of debt may take away a higher chunk from your monthly income. In the worse case, you may end up borrowing more fresh loans to pay-off your older loans.

Therefore, start paying off the most expensive debt, such as credit card loans. Pay them in full. Otherwise interest amount keeps getting compounded.

Also, avoid taking tax inefficient loans such as Personal loans.

Never borrow for depreciating assets.

2. Wisely regulating your expenses

If your expenses become almost equivalent to your income, or in some cases, your expenses become greater than your income, it means you have just broken the important law of Money regarding overspending.

It is compulsory to regulate your expenses in an organized way.

Always plan before you spend. Keep your budget in place.

Also practice living non-spending day, at least once a week.

3. Planning your Estate

Your estate constitutes your home, vehicle, savings account or current account. All your assets constitute your estate.

You must decide what will happen to them once you leave the world!

It is necessary to ensure that the right asset is assigned to the appropriate individual in the right manner.

You should start doing your estate planning as soon as you start building your asset list.

4. Begin your Financial Planning early

Investments can be started with a nominal amount. The right time in building your Financial Plan or the list of your assets is the time when you receive your first salary.

Begin taking steps to construct your financial plan as early as possible.

5. Be committed to your Financial Goals:

It is a human tendency to easily lose a grip in the goals. Take complete responsibility for all your financial goals until they all are achieved. That would be one of the best decisions of your financial life.

Also, it is wise to increase the investment amount over the period of time, so that you will be able to achieve your financial goals faster.


Failing to plan is a plan to fail.

The Right Financial Planning can significantly change the course of your financial life and improve your family future.

Whereas, unplanned finances kill the financial future.

If you have any questions, do let us know in the comments section below!

To take our advice on your Financial Planning, you can book your FREE consultation call with us, by clicking the link below.


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