How to Create a Financial Plan?

Last Updated: 19 Sep 2025

If you have understood what is a financial plan, that is just part of the job. The real job is to get down to the brass tacks. The next question is how to make a financial plan. To actually understand how to create a financial plan, you must get a full hang of the process of financial planning. Here is how to make a financial plan.

Steps how to Make a Financial Plan?

To understand how to make a financial plan, you must obviously start with the goals. That is where it all begins. But goals are the starting point. There is a lot more to the creation, assessment, evaluation and monitoring of a financial plan that you need to be familiar. Here let us look at the key steps involved when you sit down to create a financial plan.

1. The first step to create a financial plan is to set financial goals. It does not matter how fast you run, if you don’t know where you want to reach. The goals help you to crystallize where you want to reach in terms of specifics, deliverables and actionables.
2. The second step to create a financial plan is to create a budget. Bernard Shaw called a budget the attempt to equate your earning capacity with your yearning capacity and that is the most precise definition. Look at your monthly inflows, outflows, how you can cut corners, how to cut costs without compromising on lifestyle, savings surplus etc.
3. The third step is to think in post-tax terms or rather you must plan for taxes when you create a financial plan. For example, capital gains are more tax efficient than dividends. Similarly, equity can be more tax efficient than debt. Long term is always more tax efficient than the short term. The list can go on, moral of the story is to be tax smart.
4. You cannot really create a financial plan unless you build an emergency fund. That must be approximately equal to 5-6 months of your average earnings. Invest this money in liquid assets like liquid funds and only fall back on them in an emergency. Above all, this will ensure that you don’t have to do a fire sale of investments to raise cash.
5. You need to create a financial plan to create wealth but you cannot create wealth if you do not manage debt. If you are paying 35% interest monthly on huge credit card bills, perish the thought of building wealth. Cut down on high cost debt and consolidate multiple debt into a few units for simplicity.
6. When you create a financial plan, you must also protect the plan with insurance. You must insure your life, the health of your entire family, insure your assets to avoid impairment losses and finally also insure your liabilities to avoid nasty surprises in an exigency. This step also looks at the apt insurance policies. Stick to low cost term plans and avoid the lure of endowments and ULIPs.
7. Look to create a corpus for your retirement and for the education of you children, The sooner you start the better it is as you get more value for your investments. That way, the power of compounding works best for you.
8. Work out a smooth succession plan for your assets so that your dependents can enjoy the benefits after you in a hassle-free and structured manner. This includes finalizing the will, planning the sharing, appointing a trust administrator etc.

What is Financial Behaviour?

There are broadly two approaches to financial behaviour The first is the detailed study of how an individual’s upbringing, family, community etc impact their spending and savings decisions. This called the causal study. For example, North Europeans tend to be more conservative on spending than South Europeans. In India, the communities like Marwaris have a better sense of thrift, which is passed on to the generations.

Having the seen the cause, let us also look at the effect. You can also look at financial behaviour in terms of how people behave in terms of the usage of cash and credit as well as savings behaviour. For a long time, Indians preferred cash but have seamlessly shifted to digital means. Similarly, India remains credit conservative with the explosive growth in debit cards not matched by the growth in credit cards. This list can just go on.

How to Review your Financial Plan?

It is not just enough to create a plan. Such plans must also be reviewed, monitored on a regular basis and appropriate changes made where necessary. Here are 3 steps to review the financial plan.

• You must periodically take a call on whether all the goals that you have set continue to be relevant till date. For example, once a goal is achieved, investments pertaining to that goal can be done away with and reallocated. If you have planned for your parents health and if they are not with you any longer, you allocation needs a change.
• Some goals may become redundant and new goals may get added. For example, you may have originally planned for one child, but you have two kids now. How do you manage this in financial terms. How to modify your plan accordingly?
• Review financial plans on market realities. For example, debt yields may be 200 bps below your original estimate. How do you make up for that gap. Either you increase your exposure to equity or stay in debt but move lower on the rating curve. You must make a careful choice in this case.

Frequently Asked Questions

How to decide your asset allocation?

Here is how you can go about allocating funds to your assets when you create a financial plan.

• Start with assessment of your risk tolerance level. What is the risk you are willing to take and what is the risk you are capable of taking?
• Your asset allocation will largely depend on Investment Goals and Time Horizon. For every goal and time horizon, there is a product matrix to choose from.
• Once the broad assessment is made on asset mix, get to specifics like how much in equity, which equity funds to buy, which debt funds, which plan to opt for etc.
• Don’t base your asset allocation on market volatility. Keep your goals as the guiding factor. That is the bigger picture you must focus on.
• You must finally take on asset allocation on a continuous basis based on the regular review of goals and of the performance of your financial plan.

How to account for future losses?

There could be future losses due to market vagaries, falling yields, higher taxes or higher inflation. When it comes to projecting future losses, try to be liberal and factor in as many worst case scenarios as possible.

Should I consider my past expenses?

When you make any estimate, the past estimates will be your guide to extrapolate the future. That is the crux when you create a financial plan.