Seven steps to financial fitness

Follow this seven-step diet plan to see the sagging financial fat turn into hard muscle. Remember, the result of the diet is as good as the way you implement it.

1. Make a current assessment

No diet plan will work unless the doctor understands the current physical and mental make-up of the patient. Similarly you need to list out your financial assets and liabilities to see where you stand financially. On the asset side list out the cash in your bank and the value of your fixed deposit. The value of bonds, debentures, shares, mutual funds, property and other valuables you own. Include the cash value of your insurance policies. Now deduct from these assets the sum of your liabilities that includes unpaid home, car and credit card loans and any other debts you may have. The value you now get is your Net Worth statement. Says Rajneesh Singh: “We felt so rich after we had completed this step that we felt energised to carry on further.” Singh’s response is not unusual, financial planners across the world note that most people are richer than they think and once they look at their current wealth, they feel motivated to protect and build it further.

2. Secure current assets and income streams

The next step the doctor will take is to make the patient stable at the current weight, even before she puts the person on a new diet regime. So also, your diet plan for a financially fit life must ensure assets, like home and its contents, car and other valuables are secure against fire, theft and other destruction. If you are the principal breadwinner then your family depends on your income for their lifestyle. Remember to keep looking at insurance as a protection device instead of an investment instrument.

3. Make future financial goals

The doctor will fix a target to your body weight before she puts the plan in motion. You need to fix future financial goals in order to reach them. You’ve never missed an insurance premium or failed to make your tax-saving investments, have you? That is because they are identifed targets. Review your life’s financial goals and write them out. The usual ones are a car, a home, children’s higher education, their marriage and retirement. Write down your own goal set. The Singh family is targeting the goals of a home, educating one-year-old Kartik and their retirement simultaneously.

4. Determine your risk profile

The doctor will not put you on a diet without evaluating your existing physical condition, allergies or reactions to medicines if any. So also, no plan can be put in place unless your unique financial and family situation is evaluated to point out the products that suit you. As a general rule, younger people, with long term goals and fewer dependants can take higher risk and go aggressively for high risk-high return products like equity and property. Older people with short to medium term goals can take less risk and have debt and equity balanced out. A rough rule is to allocate a part, equal to your age, to debt in your portfolio. If you are 40 years old, allocate 40 per cent to debt. Risk-averse Rajneesh was convinced by his planner to taste a few mutual fund products and after a year of seeing his portfolio grow, Rajneesh is willing to take the higher risk his age and goals require.

5. Make the plan

The doctor is now ready to make recommendations about a diet plan that fits in with your unique needs and body type. So also with a financial plan. It is only after you have identified your unique financial needs and your own attitude to risk that you can build a strategy. This is the stage that you may need help since putting all the variables together might need number skills. Ask your chartered accountant or find a qualified financial planner who can help you with putting the various elements of your plan together. If comfortable with basic maths and excel sheets, you can do it yourself. Rajneesh and Arti, after one year of planning, have doubled their monthly savings target to Rs 20,000. They have identified a new goal for long term health care and want to reach their existing goals faster.

6. Implement the plan

However great the diet plan, unless executed, it remains as worthless as the paper it is written on. The doctor can only recommend a diet and exercise regime, you have to implement it. Similarly, unless you put your financial plan into action, it will remain a plan and not become real. Be sure to break up larger goals into smaller, easier-to-do targets. Depending on the final goals, make a monthly saving target and fix an instrument to put that money in. The instrument could be an insurance product, a tax-saving scheme or an investment product like a mutual fund or direct equity. The most difficult part is to cut the first cheque to make the first investment. Take the first step. Remember status quo is also a decision.

7. Monitor the plan

No diet will work unless the doctor keeps a tab on progress and changes elements of the plan according to changed circumstances or targets. Similarly your financial plan is not a constant. It needs to change as things around you change. The change could be general, like a reduction in interest rates or increase in inflation. Or it could be personal, like getting a job with a higher salary, the spouse going to work or a new child born. Each of these changes will change the way your financial plan will look. Review at least once a year.

We have changed the way we earn and spend our money. It’s time to change the way we save and invest. Do it now!