The Seven Steps of Financial Planning

THE SEVEN STEPS OF FINANCIAL PLANNING

Hi, if we have been recently acquainted, I am a former banker and corporate executive, now on a journey to get professionals, especially beginners, started on financial planning. Every week on the Financial Freedom Guide, I share one simple concept or idea around managing money or careers, which can, directly or indirectly, help you head towards financial freedom.?

Over the past few weeks, we have understood risk, return, and the relationship between the two. We have got an overview of the various asset classes and, in due course, will get into more detail about them. This week, I want to help you understand the financial planning process and the steps needed to meet your wealth creation objectives.?

Before we begin, though, I need you to have a clear mind and ask that you take a very short break before you continue reading. The rest of the screen should be blank, so you really have nothing to do. So take a walk, or drink a glass of water, listen to a song, distract yourself, and only scroll down after five minutes have passed.

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PLEASE WAIT FIVE MINUTES.

YOUR TIME STARTS NOW.

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Ok, great, welcome back! I hope you are refreshed. Let us dive right in.

The financial planning process, the way I approach it, has seven steps.

1. BUDGETING: The first step is to have a broad sense of your finances. How much income do you have each year, and how much are you spending? Consequently, what is available to you to save and invest???
2. RISK PROFILING: You then need to gauge the level of risk you are comfortable with. Some people are risk-averse and uncomfortable with losing even a little bit of money; they are willing to let go of potentially higher returns to play it safe. Some are extreme risk takers, willing to gamble a lot of their principal to strike it rich. And the rest are somewhere in between. There is no right or wrong–each of us has an inherent affinity or aversion for risk, and any approach is perfectly acceptable.?
3. GOAL SETTING: The next step is to lay out your broad life goals–what do you want to achieve in life and ideally, by when? Then try and quantify the financial sum you need for each goal. Want a fancy car next year–how much will it cost? Want to send your child to college in ten years–what will be the corpus required to fund it? Keep inflation in mind–things will be much more expensive when you eventually purchase them, so account for that.?
4. INVESTING: You now know how much disposable income you can invest and what you need that wealth for. After that, it is simply a matter of investing your money into products that offer you the highest returns at an acceptable level of risk and within the desired time frame.?
5. CONTINGENCIES: We can never prepare for everything perfectly, and life will occasionally throw unexpected surprises at us. We should have contingencies in place if something goes wrong.
6. MONITORING: Once you have started investing in the appropriate products, you must monitor your portfolio regularly. Your life objectives, financial situation, and market conditions will change over time, and you will be required to rebalance your portfolio occasionally. Therefore, you need to keep track.?
7. WAITING: Once you have all of the above in place, it’s straightforward. You must have patience and wait, letting time and the power of compounding work their magic. Don’t panic when markets crash, and don’t celebrate when everything is rocketing up. Just stick to your plan and wait patiently.?

The job of a sound financial advisor (whether your banker, relationship manager or family member) is to guide you through the first six steps.

And just as a doctor will not blindly prescribe medicines without understanding your symptoms and drug allergies, neither should your advisor recommend products without understanding your risk profile and long-term objectives.

Look back at how much interest they have shown in understanding you as an individual. That should give you a sense of how good they are at their job.?

Your responsibility is to take ownership of Step 7–displaying patience and waiting. It is easy to get swayed by emotions, but you must not be affected by either greed or fear.

A quick buck can be made or lost in minutes, but wealth is only created over time.

So, look back to the exercise I asked you to do at the start of this article–how did you fare? That should give you a sense of how good you are at your job!?

If my approach resonates with you, I encourage you to pick up my recent book,?Three Pigs to Financial Freedom. I have developed an extremely easy financial planning system that will help you to determine the following:

• STEP 1: Your overall budget and how much you should target to invest each month.
• STEP 2: Your risk profile.
• STEP 3: Your goals, how much you need to save for them, and a tangible rupee target for achieving financial freedom.
• STEP 4: The accounts you need to open, the specific products you need to buy, and what to keep in mind when you talk to the salespeople.
• STEP 5: Simple contingency measures you need to put in place to protect your financial goals.
• STEP 6: How to monitor your progress and make course corrections.
• BONUS: Lots of practical ideas to increase your income, reduce expenses, manage finances as a couple, and other relevant stuff …

You will be equipped with all the knowledge and tools to independently develop your financial plan. Or if you have an advisor, to have much more engaged and balanced conversations with them.

Full Disclosure:?I stand to make ~Rs. 40 in author royalty on each book sale. You stand to gain tremendous clarity on managing money and achieving financial freedom. If it seems a fair deal, here is the link …?https://amzn.to/3RxYynU

Rishi Piparaiya?has held senior leadership positions in wealth management, strategy, sales and marketing with leading financial services organizations, including Citi, Aviva and Banco Santander. He left his corporate job at the helm of his career to pursue his passions. He is now a?bestselling author,?world traveller?and?angel investor.?