Steps in Financial Planning: A Comprehensive Guide | Spring Money

1. Goal Identification

2. Goal Prioritization

3. Goal Amount Estimation

4. Goal Time Frame Estimation

All these steps will help you to decide the amount to be saved every month/year and where to invest that amount.

Step 1 - Goal Identification

The process of goal identification helps you to decide what you want to achieve, and where you want to go in life. Knowing your goals helps you to concentrate your efforts and avoid distractions.

Generally, detailed thinking and planning are required for the goals to be achieved over a long period of time (> 5 years). Some of the examples are as follows,

- Child education and marriage

- Purchase of high-cost things like car, home, foreign vacations

- Financial freedom and/or retirement

Apart from these long-term goals, one should consider emergency funds as his / her important goal.

Step 2 - Goal Prioritization

People often have unlimited wants and goals all of which can’t be achieved. But since, since the resources are limited, it may not be possible to achieve all goals together. It is important to identify the right set of goals and prioritise them.

How to decide the priority of the goals?

The answer to this question is very subjective and personal. Every individual will have his / her own priority considering the situation he is in. However, there are certain guidelines and points to be thought about.

An emergency fund needs to be created first as the world is very dynamic and you never know what will happen. People with a stable and secured job/income source should create a fund equivalent to the 3 to 6 months' salary/income. Others should have a fund of 10-12 months.

Identify your needs vs wants and prioritise your needs over a want. For example, your retirement or your child’s education is definitely needed as against purchasing a car or going on a foreign trip.

Know what is truly important to you. Imagine a world without things you want and check if you can live without them, and you will find the answers.

Compare short-term goals vs long-term goals. Since you will have more time to save for your long-term goals, you should prioritise your short-term goals.

Step 3 - Goal Amount Estimation

Goal amount estimation is the process of deciding how much money you will need to achieve a particular goal. The complexity and difficulty of the process vary depending upon the goal, time period and risk capabilities of an individual.

For example, planning a vacation for next year can be a lot easier than planning for retirement because of 2 reasons. You can approximately know the amount you might require to go on vacation. Whereas for retirement planning the time period to get retired is very long, a lot can happen in this very long period which can affect the amount required.

Also, for the long period goals, the amount may change due to a lot of factors like inflation, changes in the cost of goals, changes in standard of living etc.

We will understand the goal amount estimation for complex goals like retirement planning separately. For other goals, the simple methodology is as follows,

Calculate the amount required to achieve your goal today.

Add change due to inflation every year for the number of years after which you want to achieve the goals

For example,

You want to save for your child’s marriage which is going to happen approximately 15 years later. What will be the cost if you want to spend on a marriage today? Let’s say Rs 10 lakhs. 15 years later, it’s definitely going to cost you a lot more, because of inflation. But how much? You need to consider the long-term inflation projections in the country you are living in.

Let’s assume, India will have inflation at 5% pa for the next 15 years.

That means you will have to calculate the value of today’s Rs 10 lakhs after 15 years at the inflation of 5% per annum. That comes to approx Rs. 20.78 lakhs.

So your goal amount for a child’s marriage should be at least Rs 20 lakhs.

Step 4 - Goal Time Frame Estimation

It is the process to decide when the goal is to be achieved and realised. Deciding the time frame helps in making decisions about the investment products and risk-taking capabilities. On a broader basis, goals can be divided into 3 categories, Short-Term, Mid-Term and Long-Term.

Now that you have an idea about what financial planning consists of, you should take charge of your financial health and start planning. To get a better understanding of all concepts in the world of personal finance, use the link below to download the Spring Money app. Start learning today, start planning today. Onwards, to a better, well-planned future!

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