Personal Financial Planning Process Steps to Follow

Personal Financial Planning Process

What is Personal Financial Planning?

Personal financial planning is the process of managing your money to achieve specific financial goals. It involves reviewing your existing financial status, establishing reasonable goals, and coming up with a strategy to achieve those goals.

This covers setting up a budget, saving money, investing, and making wise choices on debt and spending. A steady financial future and the achievement of your own financial goals are the goals.

Five Attributes of Your Financial Planning

If you plan to become financially stable, you should understand a few personal financial planning processes. There are five attributes to concentrate on.

  1. Plan and list out your Budget.
  2. Term Insurance.
  3. Medical Insurance.
  4. Close all Debts.
  5. Emergency funds.

Role of Budget in Personal Financial Planning Process:

Budget planning is done in most families, but not on paper or in a notebook. If your budgeting is done in your mind, you can’t co-relate it again and check where you have spent more. Monthly budgeting has a huge role in personal financial planning as it cuts down unwanted expenses and identifies the gaps for saving and investments.

This is a big problem because most of us cannot save money. So, once you start a month, start with budgeting, and spend as similar as your budget. Do your budgeting in a note or a diary and check it weekly or monthly.

When you frame your budget, allocate some percentage of your earnings to savings and plan your expenses.

The budget should be taught to your kids as financial literacy from age 6.

Please refer to the following table for sample budget planning.

2House rent / Home EMI  
4Vegetables & Fruits  
5Gas Bill  
6Current Bill  
7Children Education  
8Personal Loans / EMI’s  
9Bike Maintenance  
10Petrol / Public Transport  
 Difference (Plan vs Actual)0
 Savings Percentage


Role of  Term Insurance in Personal Finance:

Most people complicate between “Term insurance” and “LIC Policy – Endorsement plan or cashback policies”. Term insurance is the only perfect life insurance; this is the second step to follow in personal financial planning. We always advise our clients that without proper term insurance, please avoid financial and investment planning.

The yearly premium will be less than other policies, but the assured sum will range from 25,00,000. The only thing people need to understand is term insurance has to be taken by the person on whom the total family responsibility is laid.

To be simple, if person A takes term insurance at age 25, coverage for the next 35 years, i.e., till his age 60, the sum assured is paid off only if person A is no more (late) in the covered years. The reason for death may be accidental hospitalization, or due to some disease.

Before buying term insurance, please check the benefits of the company you apply for and the coverage conditions and Claim Settlement Ratio (CSR), which is primarily more important. Above all, take the policy in well-reputed companies.

One should get minimum take coverage of up to 1 crore, which will benefit the family who really on them after their death. They can’t be replaced physically, but their term insurance can support their family financially.

Role of Medical Insurance in Personal Financial Planning Process:

Medical insurance is primarily the most important gadget to add to everyone’s life. In recent times we might have witnessed many new diseases sparking into the human world.

If we don’t have medical insurance, we may get loans or wash off our savings. It’s very hard that we save every penny of money and end up losing for a known or unknown, curable or non-curable disease.

We should take medical insurance early when we don’t have any previously treated or undergoing disease. It is always advised to choose a coverage plan from a minimum of 10,00,000– 15,00,000 and a maximum as per your need.

Few people would have corporate medical insurance offered by their employer, but the coverage for your family will be 3,00,000-5,00,000 maximum for a year. This will not be a suitable one in the long run.

What one should have on their watchlist while purchasing Medical Insurance?

  • Claim Settlement Ratio of the company
  • No Claim Bonus (should be equal to or more than 100%)
  • Pre hospitalization & Post – Hospitalization coverable days (Normally opt for 60 days cover in both the parameter)
  • Free Medical checkup benefits
  • Number of hospitals covered under your insurer
  • The policyholder also has to look at how many years the treatment for pre-existing or ongoing treatment disease will be covered up.
  • The policy has to cover all medical conditions, critical care, and diseases like cancer covers.

When should I plan to purchase Term Insurance and Medical Insurance?

An individual on whom all the family responsibilities are laid has to ensure himself and his family members at an early age.

For Example, before age 25 will always be a good period to get insured. Where the yearly premium will be very low compared with one who buys the insurance at the age of 45.

So, plan wisely and buy both Term Insurance and Medical Insurance at the age of 25; if you have purchased both these plans in your 25s, it is not too late to buy instantly.

Note: Always consider the amount spent in securing these insurance plans (Term & Medical Insurance) as an expenditure in your part of life as how you spent on vegetables and fruits or other groceries

Personal Financial Planning Process teaches you to be Debt Free:  

Once you have purchased term and medical insurance, the next step is clearing all your debts. Also, never throw your sight towards No Cost EMI, as it holds hidden charges and makes you spend before you own the money or fund.

Another fundamental in financial planning is to close all the debts. This is the main reason for everyone becomes very poor in having a healthy financial goal.

There are two methods to plan and clear off your debts.

  1. Avalanche Debt Method
  2. Snowball Debt Method

Avalanche Debt Method:

The Avalanche method is planning your debts to clear from the highest interest rate to the lowest one. Like credit cards, interest rates vary from 24-40% per annum has to be debt-free first.

Then personal loans in which interest rates will be between 12-18% PA have to clear after clearing credit cards. This is how the Avalanche method works. Select the highest-interest loans to be cleared first, and so on.

Snowball Debt Method:

The Snowball debt method works inversely to the avalanche method. Physiologically we people get some boost if we clear at least a single debt. 

So, choosing the lesser interest one or lesser debt amount like agriculture loan, gold loan, etc. Once you clear the lowest debt, move to the next lesser loan amount or lesser interest rate, and so on.

Role of Emergency Funds in Personal Financial Planning Process:

This is the most important fundamental to do before financial planning.

Why an Emergency fund?

Most people are in private jobs, small businesses, entrepreneurs, or self-employed, where our job and business are uncertain. In recent times, we might have heard of mass layoffs and shutdowns of many MSME manufacturing sectors, hotels, etc.  

In this kind of situation, if we were well planned for 6-12 months of our expenses as savings, we wouldn’t go into stress on managing our family.

Employees: The job-going people should have at least 6 months of their monthly salary in savings as an emergency fund.

For example, if a person ‘A’ is an employee working in ABC company, gets a monthly salary of 15,000. Then he has to save min 15,000 x 6 months = Rs. 90,000/-

Self-employees: The self-employed or small business people have to save at least 12 months of their monthly budget. It would be safer if they saved for 18 months.

For example, if a person ‘B’ is self-employed and owns his engineering works business. His family budget for a month is 25,000; then they have to save at least an amount of 25,000 x 12 months = Rs. 3,00,000/-


  • The personal financial planning process is the step-by-step approach to making a person financially free.
  • This teaches an individual to start by planning their monthly budget, investment, and retirement planning.
  • Understanding the importance of financial planning will keep an individual focused on financial goals and becoming financially free.
  • Gold can also be an emergency fund, but investing in gold should be checked with a financial planner for better decisions.
  • Financial planning as a couple is an additional benefit, and it could help to break the poverty chain.