“Tell me about the Financial Plan”, Sada asked the Bank Manager.

Everybody has to have a financial plan. It is a statement of financial receipts and payments, incomes and expenditures during a period ranging from as a little as a month and as long as 1 to 5 years and even more. Governments present every year their financial plan, which is known as the Budget. Individuals or household families need to have their financial plan.

Once you have your financial plan, you are able to consider your financial objectives and goals against your available resources, and consider several strategies to improve your finances and choose the best one for your goals and profile.

In preparing your Financial Plan you have to follow a step by step approach. There are a number of factors which govern your financial plan and its preparation.

Factors that shape your Financial Plan are:

  1. Size of your family and number of dependents in the family.
  2. Age of family members.
  3. Financial resources and assets with liabilities like loans also.
  4. Your financial goals, like buying a car, house, education, holidays, seeking investment vehicles, provision for emergencies like medical treatment.
  5. Your risk profile when you plan to invest your savings.

“Tell me now how I can proceed in preparing such a Plan”, asked Sada.

You will have to proceed step by step in preparing your Plan as follows:

  1. Annual Plan. You must start with an annual plan divided into months. You can take either calendar year or financial year. Financial year is better because you are also able to better plan your tax management. You can work out your tax liability and plan to avail tax benefits.
  2. Income Estimation. Estimate your income for the year from sources such as salaries, rent, interest, dividend, profit business, sale proceeds and gains from sale of shares, property.
  3. Expenses List. List out and estimate your expenses, monthly and annual. Until you take a tally of your day to day and other regular expenses, your financial plan will be immobile. In fact, this should precede your income estimation. Further, it is absolutely essential to have the correct estimation of expenses. Neither overestimation nor underestimation.
  4. Scope for Savings. While rising incomes provide scope for raising your savings, you have the potential to generate savings also by controlling your unnecessary expenses and those expenses you can defer. Control of expenses is the best way to have your income and eat it too. You need to look at the act of saving from a different perspective. 
  5. Avenues of Investment. Savings allow you to deploy resources in avenues which generate returns, income, profit.
  6. Determine your Risk Profile. Your risk profile is critical when you plan your investments. 
  7. Second Source of Income. Your financial plan must always work out ways in which you can supplement your normal income from other sources.

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