Growth Plan: What is it & How to Create One?
“A goal without a plan is just a wish”
Planning is a much-needed life skill and its benefits can translate into your personal finances too, if applied right. Irrespective of your financial background, a well-planned journey of financial growth can help you amplify your wealth with minimised levels of risk.
Simply put, a financial growth plan is a roadmap you can use to achieve the financial prosperity that you seek. In this article, we will delve into the finer details of what constitutes a growth plan, along with how to create an effective growth plan, while also factoring in a few quirks that are exclusive to the Indian financial sector, thus helping Indian investors to create a truly tailor-made growth plan.
Read on to learn more about how you can harness the powers of compounding combined with market research to create effective growth strategies for your hard-earned money.
What is a Growth Plan?
A financial growth plan refers to a strategically curated plan of action that contains an individual’s current state of finances and his or her long-term financial goals, along with strategies to achieve the aforementioned goals.
Life can hit you with the most random of expenses when you least expect them, and a growth plan can help you mitigate the damages that such risks would pose on your state of finances by planning ahead for them. Expenses such as major debts would be paid off first in an ideal scenario, and the risks posed by unexpected medical expenses or expenses of a similar nature could be mitigated by creating an emergency fund.
A growth plan would give you guidance on the amount of money you would need to have in order to meet your objectives and obligations, and it would help make the process of obtaining such large amounts of funds less strenuous by breaking down the goal into smaller, more easily achievable milestones. Moreover, a well-documented plan would also help you track your progress over the years as you head towards financial well-being.
How do you create a Growth Plan?
A plan can be made either independently or with inputs from a certified financial planner or advisor. However, before one gets into the creation of a growth plan, it is essential to understand the simple yet important concept of Compounding, as it plays a major role in the journey of every growth plan.
Compounding: What is it, and how do I leverage it?
Albert Einstein has referred to compounding as “the eighth wonder of the world” and rightfully so.
Compounding is an important concept that lays the basic foundation for financial growth. Simply put, the concept and the process of compounding is what enables your initial capital to earn interest, and later, enable further generation of more returns from the earlier capital combined with the interest accrued on it.
A simple example has been given below to illustrate the same:
An investment of ₹100,000 in a mutual fund that generates an annual return of 14% would result in a net capital of ₹114,000 by the end of the first year. Returns for the second year would be then generated on ₹114,000 and not the ₹100,000 from the first year, thus offering higher returns with every passing year. Such accelerated levels of growth would ensure that wealth is built at an exponential rate with the passing of time. While, for a short period this may not sound exciting, however, over a long period of time the returns can be mindboggling!
To truly harness the power of compounding for your growth plan, understand that time and consistency are your best allies. Making an investment as early as possible, followed by consistently following up on the same and making regular contributions to your investment vehicle of choice will ensure a steady stream of contributions to compound over a larger period of time.
Steps to Create a Growth Plan
The following steps should help you create an effective growth plan that can be tailored to your financial needs, goals, and risk appetite.
Step 1: Set Clear Financial Goals.
Start by answering the question of ‘Why’ you’re saving or investing in the first place. It can be a multitude of reasons, ranging from wanting to buy your dream home, funding your children’s education, achieving a life of financial independence, or anything as you see fit. Whatever be it, being clear about your final objective helps shape your strategies accordingly and pick the best investment options accordingly.
Step 2: Assess the current state of your finances.
Evaluate your current financial standing. This will help you understand where your revenues flow in from, the assets you possess and can leverage to ensure further financial growth, along with the liabilities and debts you owe.
A clear understanding of the income you make, along with the returns your assets deliver, when compared with the amounts that your debts consume and the priority of such debts (i.e., loans with a higher interest rate such as credit card debts are best paid off earlier, while low-interest rate loans on assets such as a home or a loan on a business that is profitable can be paid off over a slower period of time) will help you prioritise how you manage your finances.
Establishing an emergency fund before making any investments would also be highly advisable, as it would give you something to fall back on in a worst-case scenario.
Step 3: Create a Budget.
Establish a budget that keeps your expenses well below your means. The 50-30-20 rule is a good example of a budget allocation strategy, wherein 50% of one’s post-tax income can be allocated to immediate expenses, 30% for basic entertainment, and 20% for clearing debts and investing for the future. This is just an example of a budgeting strategy, and one may allocate their revenues differently according to their financial aims and requirements.
Step 4: Pick Suitable Investments.
Conducting market research is crucial in this step. There is a wide range of investment options available with varying levels of risk. It is advisable to select an investment avenue that aligns with your risk tolerance levels, the time period over which the investment is sought to give the desired returns, and overall financial goals.
While securities such as Equities and Derivatives are famous for their high-risk, high-reward nature, securities such as government bonds offer guaranteed returns with lesser risk.
It is advisable to diversify one’s investments across varying investment options, including alternative investments such as Peer-to-Peer lending, or real estate, so as to minimize risk and enhance portfolio security.
Step 5: Track the Market and Adjust your investments.
It is advisable to stay informed of recent developments in the market and how they can affect the investments you make. Market Research is extremely rewarding from all perspectives, as it can inform you of anything from recent regulatory changes made by, say, SEBI or RBI, or even something as simple as the publication of an earnings report by a company whose stocks you hold. Being aware of such developments can help you fine-tune your portfolio to make respectable gains, while also helping you avoid and mitigate losses that may arise over the passage of time.
It is ideal to track your portfolio over every financial quarter, as companies publish their earnings on such a timeframe. An investment advisor may be consulted if you seek a second opinion.
A financial growth plan should cover different aspects of your journey to financial well-being. It should cater for your short-term and long-term goals, needs, and emergencies. However, the ultimate object of a growth plan, as the name suggests, is wealth maximisation. In this article, we have seen how you can construct a custom growth plan for yourself, by going through the steps mentioned above. Remember, it is always advisable to consult a financial advisor before you make any major financial decisions.
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