Top 5 Components Of A Financial Plan

  • 30 Jul 2023
  • Read 5 mins read

Five Components Of A Financial Plan

There is no disputing the fact that financial planning lies at the core of achieving long-term goals. After all, if you don’t know where you are headed, it does not matter how fast you run. However, the financial plan itself is not just one comprehensive document, but a summation of a series of plans. Here is what a financial plan comprises of…


Laying out the Cash Flow Plan

This is the base because cash is the base on the receipts side and the payments side. You have to ensure that you have the funds when it is time to invest or when your SIP due date comes. Your cash flows should take care of emergencies and exigencies without disrupting your overall long-term plan. After providing the plan, you must have enough to meet your regular expenses. That is the outflow side of it. How about cash inflows? Liquidity must be available when you require it. Your child’s higher education will need fees to be paid at regular intervals. Your retirement cannot only be about a lump sum but also about flows and annuities post-retirement. You must leave enough cash for your EMIs and inflation too.

Growing with your Wealth Creation Plan

This is the key to creating wealth in the long run or making money work much harder for you. You will not create wealth by investing money in liquid funds and bank FDs. You must be invested in equity and equity funds to create genuine wealth in the long run. For wealth creation, the first requirement is that time value must work in your favour. Therefore, the earlier you start, the better it is. Secondly, your asset mix for long-term wealth creation must be biased in favour of equities. There is no choice.

Charting your Insurance Needs Plan

The last thing you want is to create wealth for 10 years and see all the wealth evaporating because you did not plan insurance needs properly. Rule 1 is that your life cover must take care of your family’s monthly cash flow needs via risk-free investments. Rule 2 is that your entire family must have adequate health cover, ideally through floaters. Rule 3 is that assets are adequately insured. Rule 4, ensure that liabilities are also insured through term covers, but avoid endowments. Don’t mix insurance and investments.

Have a tax-efficient financial plan

It is said that in this world you don’t escape death and taxes. Hence evaluate all your investment outcomes in post-tax terms. Make the most of exemptions like Section 80C, Section 80D and Section 24. Your financial plan must maximize post-tax income. Similarly, dividend plans of mutual funds are not tax efficient and growth plans make more tax sense. Be wary of moving assets since it has tax implications. The moral of the story is that at each stage of the financial plan, you must evaluate outcomes on a post-tax basis.

Succession planning in place

The last thing most people want is your family members fighting over your hard-earned wealth in their absence. Ensure that your succession plan lays out how you want that wealth to be allocated. While your children must get a fair share, clearly articulate who has the decision-making powers in your absence. Most people like to allot some money to charity and rightly so. However, it is best to register a will and make this crystal clear. The process can be complex if you are a businessman since your succession plan must also lay down how the business will be carried on. Individual roles can be articulated in the succession plan, with adequate review and monitoring by a trusted person.

One can add other plans to this list like an Emergency plan or Debt reduction plan, but they would typically be subsets of one of these segments. To get the overall financial right, you need to get these compartments right.