The First Step Of Financial Planning Is….

Ashika Group
4 min readFeb 5, 2021

The answer to the question as to what’s the first step in financial planning is best given by the movie — the Matrix (part 1 that is). For those of us who have seen it, you will remember the scene when Neo meets the Oracle for the first time in her kitchen and she points to a sign that reads “Know Thyself”. These 2 simple words are the answer to the question above and if this article can be summarized in three words it would be these — To Know Thyself.

Know Thyself

Before taking any decision in the financial world with regards to investments, redemption etc., the first thing you need to do is look at yourself. What do we mean by that? Well, here are some basic questions that need to be answered before you get on to some serious financial planning

At what stage of life are you?

What are your goals?

What are you willing to do to achieve those financial goals? And what is the timeframe by when you want to achieve these goals is very important.

“But what is the connection between this and financial planning?” you rightly ask. Before we delve into that let us first see what financial planning actually is.

Financial Planning

Planning. What is life without it? We plan our day, our month, our year, our lives. Everything we do needs to be planned meticulously and executed flawlessly right?

But when it comes to finance, the words Financial Planning almost seems like an oxymoron. Who can resist the latest iPhone with the fancy headset or deny the spouse a costly watch or a piece of jewelry on the anniversary. All this needs money to execute and that needs some planning for sure.

But what if a situation like COVID hits your salary or monthly income irrespective of the source?

The delicate balance of managing payments on all the splurging and the income is affected and we have the tension of managing all these outstanding payments — at that time the importance of a financial plan comes to the fore. One of the basics of any good financial plan is to have a contingency fund in case things go south.

There is no harm in discretionary spending if we have the plan for it and set aside the funds for it, without disturbing investments or regular Ghar ka kharcha.

Defining a financial plan

Investopedia says this about a financial plan “A financial plan is a document containing a person’s current money situation and long-term monetary goals, as well as strategies to achieve those goals. A financial plan may be created independently or with the help of a certified financial planner. In either case, it begins with a thorough evaluation of the individual’s current financial state and future expectations.”

So the idea is that you see where you stand, see where you want to go and then start moving there in terms of your finances and the first step — to know thyself

So What Should We Know About Ourselves

When it comes to financial planning, the most important thing is to know the following:

1. Our Financial Goals

. It is very important to have a realistic financial goal and then save, invest & redeem according to those goals. It could be a short-term goal — to be achieved by the end of the year, a medium-term one — to be achieved in 3–5 years or a long term one with a fulfillment horizon of more than 10 years. It is vital to know where you would like to go!

2. Our Existing Financial Position

Dreams are great to have, but where we are currently today will determine the success or failure of the financial goals. We need to take a long, hard look at where we currently are in terms of monthly inflows and outflows and set our goals accordingly. Our existing financial position is like the alarm beep if you start overspeeding on your goals and hence keeps a check on the feasibility of the same.

3. Our Risk Appetite

The importance of this point cannot be overstated. Many of us have goals and are willing to invest to achieve those goals. Imagine if your investments went up by more than 70% in a year, who wouldn’t like that? But very few of us have the courage to remain invested if the value of our investments falls by more than 70%. There is an old adage in the world of investing — Higher the Risk, Higher the Gain. Therefore, investing in say a pure Small-cap equity fund will give you more than 70% returns (there are funds that have delivered this) when the markets are high, but when they fall, the small-cap fund could crash more than the broader market correction. Hence, risk appetite is critical to the entire exercise as it brings in preciseness & stability in the plan.

Final thoughts!

The first step, therefore, to build a good financial plan is to know who you are in terms of how much risk you can take, your existing financial position and of course your dream or your goal for which you are saving, once you have these penned down then we look to the second stage of the financial plan. Keep watching this space to know what that is!

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