Yes, you can make a financial plan all single-handedly. However, it is better to take expert assistance from certified financial advisors. While doing a financial plan successfully, you have to include cash flow planning, investment planning, and tax planning.
How to Prepare a 5-Year Financial Plan?
Financial planning is a step-by-step procedure that enables an individual to meet their personal and financial goals. Basically, it acts like a guide throughout your entire journey in the financial plan and helps you track your income, expenditures, and investment to meet your goal effortlessly. However, you must decide on an optimum tenure before making a financial plan.
To know how to make a 5-year financial plan, keep reading.
Why Is Financial Planning Necessary?
As mentioned earlier, financial planning is necessary for every individual's life, irrespective of their profession. Good financial planning includes your prevailing economic situation and advises you on achieving your short-term and long-term financial goals.
Thus, financial planning explores several areas of your finances, including your investments, taxes, retirement, estate, insurance, savings, etc. In addition, with a well-organised financial plan, you can save for your children’s education, plan for retirement, manage taxes and insurance, etc.
To get better results, you can take assistance from expert financial advisors, who will provide you confidence and guide you throughout your journey along the financial plan thereby showing you a better tomorrow.
How to Make a 5-Year Financial Plan?
You can go for a comprehensive 5-year financial plan to achieve your financial goal. A financial plan will enable you to make sensible financial decisions. Furthermore, it will help you determine whether you are executing your activities and progressing towards your goals. Remember that managing money is not too challenging. All you have to do is to make a structured financial plan and follow the same on a strict note.
If you are wondering how to create a 5-year financial plan, take a look at the steps mentioned below:
Step 1: Determine Your Goals
The primary step for a financial plan is to determine your financial goals. Here you will require to clarify your target, which you are willing to accomplish. This can be regarding increasing your net worth to a substantial margin, children's education, planning to buy a dream home, going for a foreign tour, adjusting the level of disposable income, etc.
Many people are not aware of disposable income; it is basically the money left to save and spend after the deduction of income tax. Additionally, while setting your financial goal, consider the S.M.A.R.T framework, which signifies specific, measurable, attainable, realistic, and timely.
Step 2: Consider Your Existing Financial Situation
After you decide on your financial goal, your second step will be to assess your present financial status. By doing so, you will be able to judge whether you are proceeding according to your pre-determined plan or not.
First, you have to analyse your earnings relative to your expenditures. Here you have to check whether your income is sufficient to meet your bills and payments while maintaining a proper savings account and leftover money to fulfil your day-to-day transactions.
Secondly, compute your net worth, which means the difference between your assets and liabilities. Also, check whether you own a diversified investment portfolio, the amount of debt you hold, the interest rates you pay, etc. Thoroughly assess your financial status and increase its stability since it greatly contributes to making your future goal successful.
Step 3: Make a Plan to Fetch Your Goals
After assessing your prevailing financial status, your next step will be to outline the actions to be taken sequentially to achieve your goal. Some things that you can consider include:
- Creating an emergency account for savings.
- Trying to clear outstanding debts as much as possible.
- Boosting your income via passive income.
- Making a budget to track your expenditures better and manage your spending.
- Starting or optimising an investment portfolio.
- Setting your savings target for post-retirement, down payment for home, vacation, etc.
Step 4: Implement Your Plan
Upon completing the third step, you are ready to proceed and you can execute your plan. This step encompasses the collection of tools and implements and the necessary skills to successfully implement your financial plan. Here you must select whether you have short-term, medium-term or long-term goals.
Remember that the more delay you make in implementation, the longer it will take to enhance your wealth. As a result, you may experience a savings shortage during your post-retirement phase. Therefore, you need to execute your plan as early as possible to improve your present and future.
Step 5: Monitor Your Advancement and Modify Your Plan as Necessary
The final step in a financial planning procedure comes after the implantation of the plan. If you believe that formulating and executing a plan are the same, then you are wrong. After you complete the implementation step for your financial plan, you need to keep track of your progress to ensure that you are on the correct financial track.
You should assess your financial decisions from time to time with the changes in economic, personal, and social factors. If you face any discrepancy and lack in some areas, investigate the matter and find its solution quickly. Also, consult with your financial planner to get expert assistance.
Why Should You Create a 5-Year Financial Plan?
1. Manages Cash FlowOne of the main features of an effective financial plan is managing cash flow. You need to keep a record of the transactions to spend. If your entire income is spent towards the end of the month, you need to create a personal financial plan. By doing so, you can track your money which comprises your earnings, expenses, and savings.
2. Helps in Managing DebtsThese days, individuals avail loans for several things such as home, education, or vehicles. This type of obligation can lead to a debt trap if you are not cautious. This is why a comprehensive 5-year financial plan is required to ensure you do not face any financial crisis. Apart from allowing you to track expenses, a good financial plan will offer you the scope to prioritise your expenses by which you can clear your debt burden.
3. Streamline InvestmentsAnother practical reason for a financial plan is that it streamlines investments. Investments are always an ideal helping hand for individuals since it offers sufficient funding whenever required. While making a financial plan, you should to go for the scattered investment method. Maintaining a diverse portfolio is better as it lessens the risks within an investment.
4. Provides Financial SecurityFinancial security is essential for everyone. With a good financial plan, you can preserve a substantial emergency fund. By doing so, you do not have to get tense about acquiring funds or obtaining loans in case of a sudden job loss or medical crisis. Having a sizeable emergency fund will help you to pay your expenses timely.
5. Builds Your SavingsHaving a well-organised financial plan will help you save a substantial amount of money. With a financial plan, you can get an insight into your sources of earnings and expenses. For this, you can hire an expert offering tips on financial planning who can assist you in increasing your savings by a considerable margin. You can use these savings to fulfil your financial goal or cope with a medical emergency.
6. Asset AllocationYou should understand that you cannot get a similar return on investment from each asset. A sound financial plan will help you allocate assets by investing them in several available financial instruments. Doing so allows you to reach your financial goals without bearing much risk. A well-rounded financial plan formulates a sound strategy to protect you from market volatility.
7. Helps in Obtaining the Appropriate Insurance Cover
A proper financial plan helps choose the appropriate life insurance policy that suits you the best. If you are the only breadwinner of your family, it is better to avail an insurance plan to provide financial security to your dependants. If having coverage along with investment is your aim, then choosing an endowment policy can be a great choice for you.
With these plans, the insurance company will compensate the insured amount to your nominee in the event of your sudden demise. In this way, your family can maintain a normal standard of living. Moreover, having a life insurance plan helps you get tax benefits.
What to Include in Your 5-Year Financial Plan?
Cash Flow Planning
The main component of financial planning is cash flow planning. Its main objective is to ensure that a person has enough funding to achieve their financial goals. Cash flow is divided into three types: investing cash flow, operating cash flow, and financing cash flow.
You can determine the status of your net worth, assets, and liabilities through proper cash flow management. Other features of cash flow management comprise debt elimination plans, savings plans, income analysis, and budget allocation.
Another vital component of your 5-year financial plan is investment planning. In this process, you have to choose an investment option to accomplish your financial goal. Having an ideal financial plan, you can decide how much money you have to invest. Investing considers your goals, risk tolerance, and cash flow.
It acts as the base for achieving your long-term goals like education and retirement goals. If investment planning is done accurately, it will promote asset allocation and portfolio diversification. Some well-known investment plans include mutual funds, bonds, fixed deposits, etc.
Insurance PlanningAvailing the right insurance plan is another vital component of your 5-year financial plan. If you are your family's main source of income, then opting for a life insurance plan is essential. This is because if anything happens to you, your insurer will pay the sum insured to your family so they can pay off the debts and lead a normal life in your absence.
Tax PlanningYou should also be aware of tax planning since it is a significant component of financial planning. It includes the proper use of tax exemptions, settlements, and deductions. This helps in reducing the tax obligation and escalating savings. However, before making effective tax planning, you must figure out your financial condition in view of tax efficiency.
FAQs on How to Prepare a 5-Year Financial Plan
Financial planning is a process concerned with formulating a detailed plan to manage finances and achieve a financial goal in future. While wealth management is the process of preservation and enhancement of wealth.
Even though both of their working patterns are similar, they differ as per the tenure of your financial plan. In other words, if your financial plan is on a short-term note, and you need some financial assistance, it is better to hire a financial advisor. On the other hand, if there is a long-term financial plan, it is better to hire a certified financial planner.
There are three principles of finances as stated below:
- Cash flow
- Risk and return
- Time value of money
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