How to build a financial plan with a strong foundation
The motive behind making a financial plan is to have a route map to accomplish your financial goals. A plan that tells you what all your realistic goals are and what all your unrealistic dreams are. A plan that tells you where you will be financially 5 years from now, 10 years from now and 20 years from now.
A solid foundation is important for long-term construction. Similarly, when we make a financial plan there are some basic things that must be considered more.
Current Savings and Investments:
We need to take into account all the current deposits and investments you have. It could be cash, cash in the bank, investment in financial assets, real estate investments and other investments. However, this does not include assets that we keep or guard for our personal use such as personal jewelry, self-occupied homes, cars, etc. Exercise assesses our current savings and investments made to understand and realize “where are we now standing financially?”
Potential for Future Savings: How to build a financial plan with a strong foundation
We need to take into account your family income now and how much this income level is expected to rise until your assumed retirement age. Your revenue growth rate can be guessed to some extent by considering past experience experiences and your industry standard. Based on these earnings growth rate estimates, we need to project your earnings up to your assumed retirement age.
Also we need to project your expenses. Take all your expenses and project this cost until your assumed retirement age. Costs can go up for 2 reasons. One is inflation and the other is a change in lifestyle and stage of life.
After you project your income and expenses to your assumed retirement age, you will be able to assess how much you can save from year to year until retirement. Identifying your savings potential helps us determine where we can achieve financially and how quickly we can achieve it.
Future Financial Commitment:
Another important basic job is to include future financial commitments to achieve goals. First, you need to record the financial goals to be achieved on the time line. It may be you want to buy a car 3 years from now, you may want to buy a property 5 years from now, you may need to meet your first high school education 10 years from now, second child education 13 years from now, you want to retire 20 years from now and in between you want to go for some international holiday … How to build a financial plan with a strong foundation
Once you record the goal on the timeline, we need to know the future value forecast of this goal. Finding out the future value of that goal is a bit difficult but maybe if we follow some simple steps. Try to find out what would be the present value of this goal if you meet this goal today. That is, what would be the value of the goals in the cost of living today? Then project the present value with inflation to find out the expected future value of this goal.
Say one of your goals is to buy property at the end of 5 years from now. Visualize and get more details about this goal. In which locations do you tend to buy the property? What is the size and other property specifications? Once you have found the answer to this kind of question then you need to find out what the cost of the property is now. As you have gained on the present value of your goal, you need to project the current property value with an assumed inflation rate of 5 years and you will get an estimate of future value. Let’s say the present value of the property is 70 lakh, then the final value increased from 5 years may be 1 crore.
We need to do this exercise for every purpose. The end of this exercise, you will have what all goals you want to achieve, as you achieve each and how much of the future value of this goal.