How to Prepare an Annual Financial Plan – Financial Planning DIY Checklist

Last Modified on January 6, 2022

“He who fails to plan is planning to fail”, said Sir Winston Churchill once. This holds true even for your finances. If you don’t have a financial plan in order, you are likely to fail in your financial life. But you need not fret. For, Sir Churchill also said, “Let our advance worrying become advance thinking and planning”. Creating an effective personal financial plan is all you need for quashing your financial worries. Moreover, you can Do It Yourself (DIY) with a few simple tips. Wondering how to start financial planning? Read on.

9 steps to create an effective financial planning checklist

1. Analyse your current financial state
2. Set realistic goals
3. Create and maintain a budget
4. Prioritise saving
5. Invest for the future
6. Buy insurance
7. Create an emergency fund
8. Plan your taxes
9. Plan for your retirement

1. Analyse your current financial state

To be healthy and fit, you can join a gym or start following a diet plan. But before this, you need to check your current health status. Likewise, to ensure good financial health, you can devise a plan. But first, you must take stock of your current financial state. Quantify your assets and understand your liabilities. Also, do a thorough examination of your credit report. A good credit score allows you to borrow money with ease in times of need.

2. Set realistic goals

It is said you must set high goals and shouldn’t stop till you get there. It is one thing to set high goals, it is another thing to set realistic goals. Your goals must be well-defined, clear and more importantly, achievable. Make a list of your goals and demarcate them into short-term, medium-term and long-term goals. Next, prioritise them.

3. Create and maintain a budget

As the famous quote goes – A goal without a plan is just a wish. Once your goals are clear, plan how you can fund them. This can be done through a budget. A budget is an important tool for controlling your finances. It can be daily, weekly, monthly, quarterly, half-yearly or even annually. List down your sources of income. Also, make note of all your expenses – ordinary as well as extraordinary. Carefully allocate money towards your needs.

4. Prioritise saving

Be it a goal as small as going trekking next weekend, or as big as touring the world, you need money for everything. Thus, you must get into the habit of saving regularly. Clear goals go a long way in motivating you to save. You will refrain from impulsive buying and save more and more for living your dreams. Moreover, if you automate your savings, you automatically become a disciplined saver.

5. Invest for the future

While saving money is a good habit, doing it in the right place is important. Inflation can eat into your savings at home. The best way to avoid this is to invest your savings in tools that generate above-inflation returns. Carefully weigh the pros and cons of each investment before you make a choice. To keep investment risk to a minimum, have a diversified portfolio. Also, you must review your portfolio at regular intervals.

6. Buy insurance

Safety first! To ensure a secure financial future, you must first insure it, for life is uncertain. A single incident can turn your life upside down. An insurance becomes the much-needed financial support during difficult times. Make sure you have your life, health, income, and property adequately insured. Also, buy insurance for your family.

7. Create an emergency fund

A wise man once said, “Save money, for it will save you in the future.” You must not only save for your goals, but also save for the unknown. Medical, legal or other emergencies can disrupt your financial plan. You must, thus, have an emergency fund. Ideally, this fund should have enough to last you three to six months.

8. Plan your taxes

Financial planning and tax planning must go hand in hand. An effective tax plan requires you to keep every document in order that would affect your tax liability. Next, understand all the tax deductions and exemptions available. You can then invest accordingly in tax-saving instruments to minimise your tax outgo. You can also consider making charitable donations for lower tax liability.

9. Plan for your retirement

It is said that retired life is the golden period of one’s life. But this is barely possible if you do not have strong financial support during your second innings. With adequate retirement savings, you can continue being financially independent and also continue living with pride. To build your retirement corpus in a smart manner, you can either invest in an Individual Retirement Account (IRA) or 401(k) plan.

Up next: By now you know the Dos of financial planning. It’s now time to get familiar with the Don’ts.

Mistakes to avoid while preparing your annual Financial Plan

1. Do not start late

Don’t keep financial planning for the older years. The earlier you start, the better it is for your wealth and financial life. Starting early gives you the time to rectify mistakes. It also gives your money the time to grow. With time by its side, the power of compounding can work wonders.

2. Do not think short-term

While making any financial decision, think long-term. For example, ask yourself about the tax implications of the investments you intend to make for a short-term goal. Also, while making any investments for your goals, you must not ignore inflation.

3. Do not have an over-optimistic budget

Much like your goals, your budget should be realistic. Having an over-optimistic budget can create liquidity issues. For example, you start saving a larger portion of your income. Result? You may not have enough money for meeting your expenses. Such an over-optimistic move can also lead to delayed payments.

4. Do not confuse insurance with investment

While certain types of insurance act as investments, you need to have both in your portfolio. In fact, buying insurance must be one of the first financial planning steps. Investments help you build wealth and meet your goals. Insurance, on the other hand, acts as a safety net.

5. Do not disregard diversification of investments

Ace investor Warren Buffett cautions us about putting all eggs in one basket. Ensure you do not depend on a single asset class. Instead, spread your money across Equity, Debt, and other securities. If one class underperforms, the other can make up for it.

Conclusion

Having an annual financial plan is important because it serves as a road map for a secure future. Although it may sound complex, planning your finances is simple. Make sure you check off all the Dos and simultaneously avoid all the Don’ts of financial planning while you are on your journey to a stable financial life.

Still a little hesitant to embark upon your financial planning journey? Feel free to approach financial advisors who can guide you with their expertise and years of experience, and, in turn, help you make sound financial decisions.