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How to do your own Financial Planning?

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personal financial planning

Every individual needs to have a set plan or goals around his/her personal finances just like he has a career road map. First off, let us define what is Financial Planning? Financial Planning can be defined as setting into place a road map (steps & goals) with an objective to achieve a financial goal(s). Simply put, it’s a step by step guide to achieving what you have set out to do. If a person has enough discipline, it can be done without/with minimal help from an outside professional.

So how does one start?

  1. Define Goals - Firstly, goals should be very clear. Without clear goals, all efforts would go waste. Goals can be long term and intermediate. An example for a 28 year old salaried employee – his intermediate goal would be to own a car in 2 years time and a 2 bed room house in Andheri in 5 years time. Further down the road, say in 10 years time he would want to fund schooling for his child. And final goal would be have enough cash flows/investments to retire by age 55 or 60. Once goals are defined, it becomes easier to calculate how much to save/invest and at what rate to achieve those goals. Goals also help you stay true to purpose and not deviate. For example – when the aforesaid person decided to vacation in Europe with his wife in year 1, he may be reminded of his goals which may be compromised due to this splurge.
  2. Make a Budget/Balance Sheet – After defining goals, steps should be taken to see how to achieve those goals. This begins by first assessing what is one’s personal net worth and cash flows. Simply put, one needs to know his/her source of income (Salaries, Rental income, Business income, Dividends etc.) and expenses (Food, Medicine, Rentals, Utilities etc.). Accurately putting these down on an excel sheet would give net savings at the end of the month. A practical guide which I advise readers is to just categorize source of monthly income and expenses in MS Excel or any pre made software or even on paper! Once this is done, the picture becomes clearer for knowing how much one saves. Another important thing to do after this exercise is to put down a personal Balance Sheet, which is nothing but a statement which shows net worth of the individual. Jot down again on a paper or on excel sheet your assets – Value of own house and others if any, equity/debt investments, cash in bank, FDs, PPA, Car etc. Also, note down your liabilities – Outstanding home/car loan, credit card debt and any other payables. Net balance (Asset – Liabilities) is your net worth. It can be positive or negative. Be brutally frank with your net worth assessment as it will help you build a proper financial plan.
  3. Work towards goals – Now, once we are clear about our financial position and our goal, we try working towards our goal. This can be done by assessing how much amount needs to be saved / invested in the time frame to achieve those goals. For example, Mr. X would have a goal of Daughter’s wedding in 10 years time for which he would need, say, Rs. 20 lakh. His savings today per month are Rs15,000. So, let us do a bit of math whether this is achievable with his current circumstances.

Wedding Cost Today (Rs.)20,00,000
Inflation Rate (%)6.5
Wedding Cost in 2023 (Rs.)37,54,275
Expected Monthly Savings (Rs.)15,000
Expected Returns to Match (%)13

So, Mr X would need a 13% return on his savings to achieve his goal. If 13% return seems aggressive (which it is, considering most of funds would have to be deployed in equity), then he has to re-assess his asset allocation and returns target. Let us assume, 10% is comfortable as a return for him; then, his savings should be upped to Rs 18,327 per month. This is one of the many examples of goal planning.

  1. Asset allocation – Once a broad plan is made of goals and targeted return, the actual asset allocation has to be done. This is done keeping in mind one’s risk appetite and current financial condition and other factors like age, current savings, etc. So, a young 26 year old with no debt can take on more equity as compared to, say, a 50 year old person with a housing loan. Asset allocation is important as this would help a person actualize their goals. For instance, if assumption is equity would give 13-14% p.a. return CAGR over next decade and debt post tax would give 8%, then a blended return to get a 10% p.a. annual return is 45% equity and 55% debt. This can be further tweaked if you are including other asset classes like gold, real estate etc.
  2. Actual Investments – Post asset allocation, proper instruments within those assets have to be chosen which are appropriate to goals. For example, let’s say for the same Mr. X, asset allocation is 45% equity and 55% debt. Next step is to choose allocation within equity. Depending on Mr X’s appetite, a core allocation of large cap stocks/MFs can be made within the pie and a satellite allocation can be made to higher beta mid cap stocks/funds.  Similarly can be done with debt.
  3. Review – Once plan is made, the person should review it on an ongoing basis to check whether it’s in line with goals and objectives. Any change can be made if it’s structural in nature i.e. change in time frame, goals etc. Cyclicality need not be a reason to change allocation e.g. panic re-allocation from equity to debt every time market goes down!

Other useful tips which any individual should use while doing financial planning on their own –

  1. Reduce costs – This is a very simple tip which tends to get overlooked. So, if a person can cut down on non essential expenses, which can vary from person to person, it matters more than an extra 100-200 bps (basis points) return on investment. Non essential things can be small cutting corners like reducing / avoiding credit card debt, which is the most expensive at 20-36% interest p.a., no investment return can beat that! Cut down other forms of debt. Reduce non essential expenses like eating out, watching movies, etc. Remember, if a person cannot save 20-30% of income at current salary, same might be the case despite his salary rising at 50-100%!
  2. Have an emergency cash pile – Always have liquid cash (savings/liquid funds/at home) worth 3 months savings for unforeseen emergencies. This not only helps tackle those circumstances but also does not disturb your goals in progress. For example, if a person is invested in equities and has no liquid funds. Let’s say he is laid off or had a medical emergency, he would have to pull out money from equities which postpones his financial goals. Not only that, it means he pulls out at inopportune moments in the market. Perhaps at lower levels.
  3. Discipline – This simple point cannot be re-iterated enough! Discipline towards goals is what makes or mars financial planning. Investors may start off diligently by saving and investing every month, but the moment some time passes, the discipline goes for a toss based on slothfulness or panic from cyclicality in markets. There are enough statistics to support the fact that committing to your financial plan and investing at regular intervals would outperform any short term market action. Hence, stick with the plan unless there is a major change in goals, emergencies etc.


  • Mallampalli Ruthvik

    It was really a Very good Article Focusing on all aspects

    • Yogi Cfp

      Thank you. Please keep sharing your views on our articles. It will help us bring about better articles going forward.

  • Divakar

    Financial planning helps an individual meet his/her life goals through proper management of finances. In financial planning your all expenses included like buying a car, travelling abroad, children’s education and retirement planning etc. Financial planning provides direction and meaning to individual’s financial decisions. To start financial planning you start with setting up your goals, Make budget and work according to your goals etc.

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