Things to Consider When Crafting a Financial Plan

A financial plan provides you with a roadmap to achieve your financial goals. Your goals would include personal goals like buying a new car or taking a dream vacation. Your financial goal could be to retire by a certain age with a corpus of $ 1 million, provide for your children’s higher education. From a protection perspective you may want to have adequate health and life insurance. A well thought through and executed financial plan should help you achieve these goals. In this article, I have listed the important components that should be a part of a financial plan.

Components of a Financial Plan

A financial plan should cover the following aspects at the minimum:

• Plan for emergencies

• Grow your existing wealth

• Protect you from unforeseen events

• Build a comfortable retirement corpus

• Manage your estate

Let us examine these aspects in more detail.

Planning for Emergencies

The first step is to establish an emergency fund. This should address scenarios like a sudden job loss or disability caused by accidents. The corpus in the emergency fund should last at least 6 months of living expenses (this should include your regular commitments like house rent/mortgage, any other debt obligations and routine household expenses). These funds should be parked in a combination of savings accounts and money market funds rather than left idle in non-interest bearing checking accounts.

Growing Your Existing Wealth

You should start with your net worth statement which is your list of assets and liabilities. This should be supplemented by your cash flow statement which lists down your monthly cash inflows and expenses. A quick analysis of your expenses would reveal some discretionary spends that can be cut down. Your first priority at this stage should be to pay off your high cost debt, typically outstanding balances on your credit card. The cash flow statement should help you identify the surplus amount you have for investment purposes.

You need to have an investment plan that provides you with an asset allocation strategy to deploy your surplus funds. Typically, this strategy should guide you to allocate funds in appropriate asset classes keeping in mind your risk profile and financial goals.


This component should detail the risk mitigation strategies when you are confronted with unforeseen events. This is best done through insurance. You need to have adequate life insurance cover and health insurance cover. The life insurance cover should at the minimum, cover all your loan obligations in the event of your sudden demise. You require life insurance till such time you are an active earner. Once your mortgages and other loans are paid off and you have accumulated a substantial retirement corpus, you no longer need insurance. And the health insurance cover should factor in escalating healthcare costs to arrive at the sum insured. Other forms of protection include Householder’s insurance, auto insurance and other insurance covers that may be required depending on your profession.

Post Retirement Needs

This should address your post retirement expense needs. Financial planners would suggest 401(k) plans, IRAs and its variants to address this part of the plan. You can look at saving through index funds and diversified equity mutual funds to build a substantial corpus. Will or Estate Planning If you have a family, it is better that you prepare a will. If you have a substantial net worth (of over USD 1 million), it is better to have a proper estate plan that will ensure that your wealth is distributed in accordance with your wishes.


While formulating a financial plan, you should seek professional help from a financial planner. However, once you engage a professional, ensure that, at the minimum, the plan addresses all these components. After the Financial plan is formulated, ensure that you have the discipline to execute it.

Article written by

Daniel Guidotti is a full time blogger for Cap Credit and several other finance websites.

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