5-Step Financial Planning Checklist to Handle Uncertainty

If the coronavirus pandemic has taught us anything, it is that life is uncertain, and that we must account for times when it does not go as planned. It can be hard to plan for the future and work towards the financial goals we might have set for ourselves.

Moreover, uncertainty can present itself in various shapes, such as job loss, health emergencies, economic recession, etc. Although financial planning cannot help you avoid uncertainty, it can certainly help you sail through it a lot easier. Financial planning is the cornerstone for the financial well-being of individuals in times of crisis. It helps us not only secure a financial future but also lower our predicament and anxiety while dealing with uncertainty.

What is Financial Planning?

Financial planning refers to the process of following a systemic approach to fulfilling the life goals of an individual. It helps you gain control over your income, expenses, investments, and debt.

Financial planning is not just about having enough money; it is about having enough money at the right point in time. For example, it is not about having an investment corpus of $5,000 but rather having the money as an emergency fund when an emergency presents itself, such as loss of a job or medical bills.

Why is financial planning important?                                            

Financial planning presents numerous benefits such as:

  • Increases your savings

It is almost impossible to see progress in something you aren’t monitoring and periodically contributing towards. This is also true for your savings. If you do not have a clear idea around the savings you presently hold and your future needs around the same, it will be next to impossible to see an upward increment in the same. Creating a financial plan helps one to see the inflows and outflows of money at one’s own end. This, in turn, helps one to track their expenses more meticulously and then make a conscious effort towards reducing unnecessary expenses.

  • Prepares you to handle emergencies

Having a financial plan helps one create an emergency fund in times of need. Having an emergency fund makes it easier to access money in case of an emergency. An emergency fund helps you cover unexpected expenses, and hence, should be highly liquid, which means it should be easily accessible in times of need. Therefore, one needs to be mindful of where they choose to park their emergency funds. The withdrawal process of money from an emergency fund should be quick and easy too, apart from it being readily available.

  • Helps combat inflation and taxes

Inflation and taxes affect our capital in more ways than one. Even though we cannot predict the inflation rate or tax rate for the future, we can certainly prepare for it with financial planning. With better financial planning, you can opt-in for various tax-saving instruments that might be available at your disposal and also invest in financial instruments that provide you with a growth rate higher than inflation.

  • Improves your standard of living

If proper financial planning is done, one can enjoy the lifestyle they desire while still paying off expenses such as their mortgage and monthly bills. Financial planning also allows one to plan better for the future and retain their standard of living post-retirement. The process of planning allows you to have a retirement corpus ready as and when you need it.

  • Gives you peace of mind

When you plan your finances, you not only cover your monthly bills but also allow room for a little splurge on your wants! When you manage your money more effectively, it becomes easier to have peace of mind regarding your finances.

Now that we have ascertained the importance of financial planning, check out the easy checklist we have prepared to help you put your financial plans in motion.

Should you hire a financial planner or a financial fiduciary or a wealth advisor? Learn about the different designations and titles used by financial advisors here. 

5-Step Financial Planning Checklist to Handle Uncertainty

Although everyone’s financial situation varies, listed below is a comprehensive list one can use and apply to their financial plan to be better prepared in the face of uncertainty.

Step 1: Understand your cash flow statement

It is vital to first and foremost understand the sources responsible for the inflow of money (for instance: salary, interest, dividends, and so on) and the sources responsible for the outflow of the same (for instance: rent paid, loan EMI, insurance, groceries and so on).

It is a prudent financial practice to understand your daily money routines by doing a closer examination of your banking statements. Once you can figure out what your daily and monthly expenses look like, it is important to categorize them as either essential or non-essential expenses. For example, your rent and your loan EMI are essential expenses, whereas your daily cappuccino at Starbucks is probably an avoidable expense. Once you have identified areas of avoidable expenses, the next step is to utilize those funds better by putting them in a savings account.

There are countless money management tools available to help you in the process, but even a simple spreadsheet can do the job!

Step 2: Create an emergency fund

Once you have identified your unnecessary expenses, the next step is to create an emergency fund with this money as a priority. An emergency fund, as the name suggests, is a fund kept aside for events that you might not have accounted for, such as loss of a job, medical bills, and so on. This fund must be kept separate from the regular savings and checking accounts, which means that this money is not available for impulse buying or any other expenditures.

The standard recommended number to have in your emergency fund is three times your monthly expenses. You can then grow your emergency fund from this point to six and twelve months’ worth of expenses covered. Even though the process might take multiple years to build to that level, the earlier you start, the better it is.

Step 3: Reduce your debt amount

A good financial practice is to reduce the amount you owe to better utilize your funds. If your budget allows for it, cut corners from unnecessary expenses and pay more than the minimum required amount on your loan to pay off the amount quicker. Also, make sure you pay off the loan amount with a higher interest rate first. One can also negotiate down the interest rate from the bank in times of crisis. If you have a good credit history to boot, banks will be willing to negotiate the terms of your loan.

Another prevalent form of debt is credit card debt. Even though credit cards can provide interest-free credit for a certain time duration, they can also backfire if you don’t have the financial discipline to use them prudently, causing you to drown in credit card dues. If you don’t pay credit card dues on time, they charge hefty interests on the same. Try getting your credit card dues converted into monthly EMIs that you can pay in installments.

Ensure that you are spending wisely and investing your saved money in risk-appropriate investments for the long-term using these 20 tips.

Step 4: Review your investments

In times of uncertainty, there exists an apprehension towards blocking your capital by investing. However, if done right, one can take advantage of some opportunities the market presents during this time. If one does not want to take on too much risk by investing in the stock market, one can invest in safer financial instruments such as gold and government bonds.

The key to sailing through times of uncertainty is to diversify your portfolio. Have your funds spread across numerous financial assets like stocks, commodities, precious metals, government bonds, real estate, and so on. This ensures that in a scenario where one asset depreciates, you still average out good returns from your investments.

Also, while investing in the stock market, diversify your funds among different sectors and industries to diversify your portfolio. For instance: don’t invest all your money in Tech companies; rather, include other major sectors such as banking, FMCG, and others in your portfolio.

The market drop can prove to be an excellent opportunity for dollar-cost averaging your assets if you invest with a long-term horizon.

One can not go wrong if they keep themselves informed about their surroundings and then position their investments to take advantage of the same. Remember to review and adjust your portfolio to gain consistent returns even in times of uncertainty.

Step 5: Reach out to a professional financial advisor for assistance

There exists a possibility that even after putting all financial planning measures in place, you are still unable to prevent a financial emergency from presenting itself. In such a scenario, it is a good practice to reach out to financial advisors who can help you access multiple resources to make your journey through the crisis as smooth as possible.

A financial fiduciary is legally bound to place your interest above everything else in their financial services. Use Paladin Registry’s free match tool to get connected with 1-3 financial fiduciaries who are suited to help you meet your financial needs and goals.

To summarize

Uncertainty has the power to dismantle your financial goals. In such a scenario, it is important to remember that financial planning is the tool that can make the bumpy ride a little smoother for you.

If you find yourself facing some sort of uncertainty you hadn’t planned for; the first step is to not lose your calm. Look out for avenues that can help you tackle the situation better because they are always there. You just need a calm mind to look for and identify them. Start by assessing your current situation – what are your monthly expenses in comparison to your monthly income. After that exercise, bucket these expenses into avoidable and unavoidable expenses.

Once you can achieve that, stop spending your money on unnecessary items and start building your emergency fund with the same. A good number to start with is 3x your monthly expenses.

Next up, take a look at your loan amount and try to reduce the EMIs. You can start by paying off the loans with the highest interest rate first and then slowly move on to the next one. Avoid using credit cards in times like this so that you don’t end up snowballing more debt.

When it comes to investing in times of uncertainty, focus on investing for the long term. Make use of the dips in the market to average down your investments.

And lastly, if you feel things are getting out of your control, don’t shy away from contacting a professional for help! We hope these pointers help you prepare better to face any uncertainty life throws your way.

To get in touch with a fiduciary advisor who may provide you with wise financial strategies, use Paladin Registry’s Free Search Tool. Based on your requirements, our platform matches you with registered and qualified financial advisors that are best suited to meet your financial needs and goals.

To learn more about the author William Hayslett view his short bio.

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