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7 Easy steps of financial planning
Intro to personal finance

Saving to buy your first home? Dreaming of a nice car or vacation that you�ve always wanted? Aiming to get your child the best education that she can get?

Or enjoying all of this already, and simply hoping that your standard of living will stay the same until the end?

Life expectancies and aspirations are both growing. And with that, planning for a secure financial future is increasingly getting tricky. A complex financial marketplace and changing tax laws make it difficult to understand your financial picture.

Whatever stage you are at in life, you need to make sure your personal financial life gets the attention it deserves. You need to develop well-defined goals and define appropriate strategies to turn your dreams into reality. So your financial life is a conscious, well thought out move in the direction you want your life to take, rather than an accident.

How do I begin planning?

Any financial planning process is essentially composed of seven iterative steps

Goal Setting
Allocating Assets
Selecting the Instruments
Creating and Tracking your Portfolio
Reviewing the Plan

Click on any of the above links to access tools, primers, articles, discussion boards and expert interaction related to each stage of planning.

What is goal setting?

Goal Setting is deciding the end-point of your planning exercise � determining where you want to go. The more tangible your goals, the easier it is to plan for their realization. Begin by listing both your short and long term financial goals. Short-term goals are things you want within the next five years � a car, funds for an upcoming wedding.

Be aware that short-term goals leave you with lesser flexibility in planning. If your short-term goals require extraordinary returns on your investments, it�s time to do a little prioritizing. Drop some of the goals; push some for later; make tradeoffs - pick a Maruti 800 over a Santro if it is critical to buy a car.

Next, list out your long-term goals. These can stretch over a period of 10-30 years.
These goals could include: available cash for emergencies, education for children, care for family members, retirement, a nest egg to permit a career change, buying or selling a business, estate planning, financial independence or personal objectives such as a special vacation or second home.

Remember to rank these goals in order of priority too. The idea is to know your goals with a mathematical precision so you can play around with options, and re-allocate investments and expenses without contemplating over it every single time. The crisper your goals, the more easily you can pull off the whole game with whatever you have to begin with.

What is budgeting?

Once you know your goals, you need to figure out how far you are from attaining them. So take stock of your current situation � we call this �Preparing your balance sheet�.
To begin, list out the assets you own currently. This could be your property, insurance, investments and all assets you hold at the moment. Next, recall all your liabilities and put them down. All outstanding loans (home loans, car loans, personal loans) and credit card debts are liabilities.

From your balance sheet, you can now proceed to calculate your net worth. Believe us, chances are you will be very surprised (pleasantly or otherwise) when you calculate your net worth, especially if you have never undertaken a planning exercise before. This is because we rarely ever have a unified view of where all our money lies. But once you start plugging numbers in your balance sheet and do the math, you will have a whole new set of information to play with.

So first estimate the value of your assets. If you have owned your home for a number of years, you may be sitting on a nest egg. Get in touch with real estate appraisers to put the right number on your property�s worth. Record the current values of your bank balance, mutual funds, life insurance, fixed deposit, PF, PPF and brokerage statements.

It pays to use software applications that access real-time stock market data for tracking your assets. Tools like My Money Manager make it superbly convenient to monitor your assets, since you only need to enter data once, after which your mutual funds and share values are automatically updated of any subsequent changes, without your intervention.

Next estimate the value of your liabilities and simply subtract your liabilities from your assets. And bingo � you have your net worth!

What is profiling?

All right, so you know where you want to go, and how you are financially placed today. But you could still be remarkably different from fellow investors depending on a number of attributes, among them -

Risk appetite: Are you risk averse or risk tolerant? It can depend on your age, whether you have assets to fall back now, or just a dad to bail you out every time you get into trouble.

Hands on investing or collective investing: Can you track your stocks by yourself, or would you rather let a mutual fund house take your calls?

Short term or long term: Would you manage your stocks actively, or would you rather buy and hold for the long term?

Investors come in all shapes and sizes, so see where you fit in. A good financial adviser will profile you anyway, before suggesting investments.

How do I allocate assets?

This step requires a considerably greater amount of thought and advice from those in the know. While you can never tell which asset class will perform well from one year to the next, the golden rule is to remain comfortably diversified. Like they say � �Diversification is the only free lunch when it comes to investments�. And yet, there is always one kind of asset that is more suitable to your profile.

Broadly speaking, there are three asset classes � stocks, bonds and money market instruments. Each class will give you certain benefits and risks, meaning there is a tradeoff in choosing one over the other. Money market instruments will give you liquidity and preserve your principal, but returns are comparatively lowest. Bonds provide income and a moderate degree of risk to principal. Stocks provide quick growth, but also carry high risk.

So which way do you go? Take our financial health check for a quick feel of what will work best for you. On our Asset Allocation page, you will also find numerous articles on the features of various asset classes, while our experts will advice you on which way you should be looking.

How do I select the instruments?

Now you know what percentage of your money ought to go into equity, and whether you need to play the money market or not. How do you then invest in stocks? Get a demat account and start trading, or will a cautious SIP be more appropriate for you?

Your choices of instruments are countless - mutual funds, shares, bonds, public provident funds, National Savings Certificates, Post Office Monthly Income Scheme, life insurance and ULIPs, bank and corporate fixed deposits, foreign currency, gold and jewellery, real estate, and luxury collectibles such as art or automobiles.

Each instrument will rate differently on liquidity, safety of principal, capital appreciation, tax benefits and returns.

How do I create and track my portfolio?

If you have gotten your asset allocation right, it is time to put your plan into action. For buying a particular stock or bond, use a combination of advice from a financial adviser, and validating it with your own research. Remember, staying involved in your finances helps. Nothing in life is achieved if you take a hands-off approach; and by contrast, a remarkable amount can be achieved once you start getting involved.

So if your adviser suggests a specific stock or mutual fund, check it on Myiris.com independently. You can also read what brokers recommend, and what others recommend by viewing discussions and chats.

My Money Manager and Portfolio Tracker can automatically update your portfolio with each buy or sell decision in shares or mutual funds, the best way to stay on the top of your portfolio changes.

How do I review my plan?

Remember to review your financial goals and plans when there is a significant life event such as job change, marriage, birth, death or divorce. Any change in financial position should be evaluated as well. Many people have a quarterly update that reviews how the plan is being implemented. The review also considers changing goals and circumstances.


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