Going from Financial Aspirations to Financial Plan

Jun 08, 2024 / Reading Time: Approx. 7 mins

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Going from Financial Aspirations to Financial Plan

Last week, during a coffee break, my colleague Tanisha and I were chatting about life plans when she suddenly lit up with excitement.

"You know," Tanisha began, her eyes sparkling, "I have always dreamed of going on an international solo trip before I get married. It's something I really want to do."

"That sounds amazing, Tanisha!" I replied, genuinely thrilled for her. "Where do you want to go?"

"I'm thinking of places like Bali, Singapore, and maybe even Paris," she said. "I want to make unforgettable memories, and I feel like this is the perfect time before life gets more settled."

"Those destinations are incredible choices," I said. "But have you started planning for it financially?"

She paused, her excitement momentarily dimming. "Well, not really. I mean, I've been saving a bit here and there, but I haven't put together a real plan yet."

"Tanisha," I began gently, "to turn this amazing dream into a reality, you'll need more than just enthusiasm. You need a solid financial plan."

"A financial plan?" she asked, raising an eyebrow. "Isn't that a bit too serious for something like a vacation?"

"Not at all," I assured her. "Think of it this way: a financial plan is like a roadmap. It helps you manage your income, expenses, and investments so you can achieve your goals, whether that's buying a house, saving for your children's education or going on your dream vacation."

She nodded slowly, beginning to understand. "So, how do I start?"

"First, get clear on the total cost of your trip," I explained. "Then, figure out how much you need to save each month to reach that amount by your target date. It's also important to consider any potential emergencies that might come up. A good financial plan will help you prepare for those, too."

"I see," Tanisha said thoughtfully. "It's not just about saving a bit here and there, but actually planning and managing my money with a clear goal in mind."

"Exactly," I said, smiling. "With a proper plan, you'll be able to enjoy your trip without any financial stress. And who knows, you might even discover other financial goals you want to achieve along the way."

Our conversation ended with Tanisha feeling more empowered and ready to turn her travel dreams into a concrete, achievable goal. This conversation reminded me of the importance of distinguishing between dreams and financial goals and how proper planning can turn aspirations into reality.

Here Are the Steps to Turn Your Financial Aspirations into a Financial Plan:

Like my colleague Tanisha, you might have certain dreams and aspirations but don't know where to start. Whether it is travelling the world, buying a home, or securing your children's education, transforming your dreams into reality requires a solid financial plan.

The following steps will guide you in turning your financial aspirations into actionable goals. By following these steps, you can create a roadmap to achieve your dreams and secure your financial future.

Step 1: Set Your S.M.A.R.T. Financial Goals

Setting your financial goals is the most crucial step toward achieving them. Without a well-defined plan, reaching your goals within your desired time frame is unlikely. The S.M.A.R.T. framework is an effective method for setting and achieving personal financial goals, ensuring they are Specific, Measurable, Achievable, Realistic, and Time-bound.

Specific: Your financial goals should have a clear, specific outcome, such as saving a certain amount for retirement, buying a house or car, taking a vacation, or investing in your children's education.

Measurable: Goals should be quantifiable, allowing you to track your progress and know when you have achieved them, whether it is a specific amount of money or a percentage of your income.

Achievable: Your financial goals must be achievable given your current financial situation and resources. Setting attainable goals prevents setting overly ambitious expectations.

Realistic: Goals should be practical, taking into account your present and future financial situation and your ability to save and invest.

Time-bound: Financial goals should have a deadline, which helps maintain accountability and creates a sense of urgency to achieve them.

Step 2: Understand and Track Your Finances

Understanding where your money goes is essential for effectively working toward your financial goals. Start by assessing your monthly cash flow-how much income you have and how it matches up against your expenses. A clear picture of your finances is crucial for creating a robust financial plan and can help you find ways to allocate more towards savings, investments, or paying down debt.

Budgeting is a vital component of financial planning. By developing a budget, you can manage your cash flows, identify areas where you can cut non-essential costs, and save more to meet your goals. A budgeting tool can help you determine if your money is being spent on unnecessary items. It enables you to allocate funds to different categories, such as utility expenses, debt repayments, entertainment, and savings and investments. Numerous budget planning apps are available that can assist you in conducting precise budgeting exercises.

Step 3: Consider Inflation and Start Investing

It is important to evaluate your investment portfolio to ensure it keeps pace with rising prices and outperforms inflation. Many Indians still favour traditional investments like Fixed Deposits (FDs) and government-backed products, but these may not offer returns adjusted for inflation over the long term. If the interest rate on your investment is lower than the inflation rate, the value of your investment will decrease, reducing your purchasing power. Since no single investment can guarantee returns that beat inflation, diversifying your investments is essential.

It is advisable to diversify your portfolio with asset classes that typically perform well during inflationary periods. You can capitalise on opportunities during inflation by including inflation-resistant assets like stocks and equity mutual funds in a diversified portfolio. This approach helps reduce overall portfolio risk and enhances return potential. However, when diversifying, consider your investment objectives, time horizon, and risk tolerance.

Once your financial plan is ready, start investing according to your risk tolerance, investment goals, and investment horizon. Investing in mutual funds through a Systematic Investment Plan (SIP) is an excellent strategy for both novice and experienced investors to gradually build a portfolio and achieve returns that can outpace inflation.

SIPs leverage the power of compounding and rupee cost averaging, which can be highly effective in generating long-term wealth. This method helps mitigate the impact of market volatility and leverages the power of compounding.

By incorporating SIPs into your financial plan, you can align your portfolio with your financial goals and aim for returns that outpace inflation. A financial planner can assist you in selecting suitable mutual funds based on your risk profile and investment objectives.

Step 4: Stay Disciplined

Achieving any goal requires a disciplined approach, consistent effort, and a strong determination to excel in your chosen field. Financial discipline is crucial in this regard. By starting early and investing a portion of your income in well-researched opportunities, you can grow your wealth and build a solid nest egg for the future. With discipline, anyone can manage their expenses, allocate a portion of their income for savings, and plan their targets well in advance to realistically achieve their dreams.

Step 5: Prepare for Contingencies

Planning for unforeseen events with a contingency fund is as vital as investing in specific financial goals. This approach ensures your financial plan remains intact and prevents the need to liquidate investments during emergencies. A contingency fund should be easily accessible for unexpected expenses like medical emergencies or job losses.

Financial experts advise setting aside 6 to 24 months of living expenses in a contingency fund. This safety net allows you to navigate tough times without borrowing or dipping into long-term savings.

To create a contingency fund, regularly contribute a portion of your income to a separate savings account or investment option. This fund should be distinct from your regular savings and investments, ensuring easy access when needed.

Reserve the contingency fund only for genuine emergencies and avoid its use for discretionary purchases to ensure it remains intact for its intended purpose. A financial planner can help establish a contingency fund tailored to your needs and risk tolerance, recommending suitable savings or investment options that allow for emergency withdrawals while maximising returns.

Step 6: Review Your Financial Plan Regularly

Regularly reviewing your financial plan is essential to ensure that your investments stay aligned with your goals, increasing the likelihood of achieving them. This allows you to adjust your portfolio in response to personal or economic changes.

For instance, an equity mutual fund might underperform or change its investment objective. Periodic reviews of your financial plan enable you to identify and address such issues promptly.

During these reviews, it is also advisable to evaluate whether your current investment strategies are still suitable for your financial objectives and risk tolerance. Consider if adjustments to your asset allocation or investment selections are necessary.

By being proactive and vigilant, you can eliminate investments that no longer align with your goals and reallocate resources to more promising opportunities. This keeps your financial plan dynamic and responsive to market and personal changes.

A financial planner can offer valuable guidance during these reviews, providing insights and recommendations tailored to your specific goals and risk profile. Their expertise can help you navigate complex investment decisions and make informed adjustments to your financial plan.

To conclude:

Transforming financial aspirations into concrete goals requires a disciplined and strategic approach. My conversation with Tanisha shows that dreams such as an international solo trip are attainable with proper financial planning.

By setting S.M.A.R.T goals, tracking finances, considering inflation, investing strategically, staying disciplined, maintaining a contingency fund, and reviewing your plan periodically, you can achieve your financial goals. Starting early with investments, particularly through SIPs, can significantly enhance your wealth over time.

Remember that regularly reviewing and adjusting your financial plan ensures alignment with your evolving goals and market conditions. Embrace financial discipline and proactive planning to achieve your dreams and secure your financial future.

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Hiral Bhuta is a Investment Consultant & Principal Officer. She is a seasoned professional in the financial services industry, currently serving as an Investment Advisor and Financial Planner at PersonalFN. With her expertise, she plays a pivotal role as the Principal Officer appointed under SEBI's amended IA Regulation. Hiral holds distinguished certifications such as Certified Financial Planner (CFP) and NISM XA & XB, complemented by a post-graduate degree in commerce (M. Com). Her primary areas of focus encompass financial planning, investment advisory, and wealth management, where she leverages her knowledge and skills to provide tailored solutions to clients. With a cumulative experience spanning five years, Hiral brings a wealth of expertise and insight to her role at PersonalFN, ensuring clients receive expert guidance and support in navigating their financial goals.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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