Not Just SIPs: A Step by step Guide to Financial Planning the Right Way

July 4, 2025

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Starting your financial voyage can be likened to traversing an enormous, undiscovered sea. With so many places to go, like a comfortable retirement, your child's education, legacy, and myriad ways to reach them, it's no wonder you feel lost. Where do you start?

The secret isn't so much to begin but to begin in the correct sequence. An effective financial plan is a steady compass, one that navigates you through the certainty of life's storms and plots a course to your destination. It's a process that progresses systematically from stabilizing your current life to constructing your future. Follow these steps for organising your finances, taking care to construct a sound vessel before casting off for far-off lands.

Let’s break it down into several structured steps, each building on the last to lead you toward financial independence and peace of mind. This guide moves beyond just SIPs to show you the full picture on how to protect, grow, and plan your money the right way.

Pre-Step: Assess Your Current Financial Life

Before jumping into saving, insuring, or investing, it’s crucial to understand where you stand financially. Think of this as your personal financial health check-up: it lays the groundwork for everything that follows.

● Track Your Income and Expenses: Start by listing all your sources of income like salary, business profits, rent, dividends, etc. Next, track every rupee you spend over at least two months. Categorize expenses into essentials (rent, groceries, EMIs) and non-essentials (eating out, subscriptions, impulse shopping). You can track these by checking your bank statement regularly. This step will help you to calculate how much you can safely save and invest every month.

● Need vs. Want Analysis: Once your expenses are tracked, do a need vs. want analysis: Needs are essential for survival and basic living (food, rent, insurance). Wants are lifestyle-driven (frequent dining out, new gadgets, luxury vacations). Cutting down on unnecessary wants can free up funds for your future goals without sacrificing your peace of mind.

Step 1: Create Your Emergency Fund: Your First Line of Defense

You can't even dream of investing or saving for the future until you have a safety net. That's your emergency fund, and it's the essential first step. Anything can happen. An unexpected doctor's bill, a loss of a job, or an urgent repair bill for your home can upset the best of plans if you're not covered.

An emergency fund typically covers three to six months of your essential living expenses. This is not money for a vacation or a new gadget. It shields you from having to withdraw money from your investments at the wrong moment or, worse, slipping into high-interest debt to pay for a crisis. Leave this fund in a liquid fund or a high-yield savings account where it's secure, liquid, and apart from your everyday transaction account. This is the base upon which your whole financial home will be erected.

Step 2: Insure Yourself to Protect Your Family

Once your short-term safety net has been established, the next priority is to safeguard you and your family from disaster. This is where insurance comes in. For a relatively small, fixed cost, you are protecting your family from a potentially ruinous financial blow. So, insure yourself first to protect your family: this ensures they are financially secure even in your absence.

Key Types of Insurance You Should Consider:

1. Term Life Insurance: Where life insurance is concerned, the objective is straightforward protection, not investment. For this purpose, a term life insurance policy tends to be the best weapon. It offers a large death benefit during your working years at a low price. Your concern should be with covering a sum that will replace your income and pay for your family's requirements, not in earning a return on premium. A term plan should be chosen based on your job risk, financial dependents, and liabilities. Calculate the sum assured using Human Life Value or expense-based methods to replace your income and meet family needs.

● Riders to Add: Add riders in your term plan according to your personal needs. Child Education Payor Rider ensures that your child's educational aims are funded. An accidental death benefit rider provides an extra payment in the event of death as a result of accident. Income benefit riders ensures that your family receives a monthly income in addition to the lump sum pay-out, keeping them financially secure. A Waiver of Premium Rider waives future premiums if the insured becomes disabled or critically ill.

2. Health Insurance: Health insurance is essential to protect your finances from the impact of rising medical expenses. It covers hospitalisation and treatment costs, ensuring your savings remain intact during health emergencies. A family floater plan can provide coverage for all members under a single policy, offering convenience and value.

● Riders to Add: A Critical Illness Rider pays for defined illnesses such as cancer or heart attack. It provides a sum assured, which is a fixed lump-sum pay-out upon diagnosis of the specified critical illness. This is benefit-based, the full amount is paid regardless of treatment cost.

3. Disability Insurance: Disability insurance provides financial protection if an accident results in death or a permanent or partial disability that affects your ability to earn. It ensures income continuity for you and your family during such difficult times. A good personal accident policy should include both lump sum benefits for disability or death and ongoing income support if you are unable to work. This is especially important if you are the primary breadwinner.

● Riders to Add: An Accidental Disability Rider Covers disability in the event of permanent or partial disability resulting from accident

To calculate your insurance need, you can refer to this calculator: link.

Step 3: Construct Your Retirement Nest Egg

Retirement may be far in the future, but the path to a pleasant post-work life begins the day you begin earning. Due to medical progress, our lifespans have grown longer, so your retired life may be almost as long as your working years. Planning for retirement incorporates three phases:

1. Evaluate Your Requirements: Determine your present expenses and assume what you would require after retirement, considering inflation. Your desired lifestyle in retirement will significantly impact your expenses.

2. Decide Your Corpus: Based on your retirement year and life expectancy, arrive at the total amount you would need to save.

To know your risk tolerance, you can click: here.

To calculate your retirement corpus, you can refer to this: link.

3. Formulate an Investment Plan: The earlier you start, the greater the power of compounding, especially when invested in equity-backed instruments over the long term. Start accumulating your corpus through a mix of reliable and growth-oriented instruments:

● Begin with mandatory savings like the Employee Provident Fund (EPF).

● Supplement with the Public Provident Fund (PPF) for its safety, tax benefits, and long-term compounding.

● Add the National Pension System (NPS) for market-linked returns and additional tax advantages on employer contribution under Section 80CCD (2).

● Young investors should leverage their long-time horizon with an aggressive portfolio, focusing more on equities, mutual funds and other growth assets. This approach embraces short-term volatility for the potential of superior long-term returns, helping you build substantial retirement wealth.

Step 4: Achieve Life Goals with Planned Wealth Creation

Now that your fundamental needs of protection and ultimate security are met, you can turn your attention to larger-scale wealth creation through strategic investment planning. This is where you invest your excess funds to satisfy different goals in life, from purchasing a home to seeing the world.

● Know Your Risk Profile: The first rule of investing is to know your risk tolerance. Are you a conservative investor who values capital safety, or are you willing to take on market volatility for the potential of more returns? Your risk tolerance will influence your asset allocation. The rule of thumb is diversification: don't place all your eggs in one basket.

● Goal 1: Child Education Planning: The cost of education increases at a very high rate, usually higher than overall inflation (education inflation in India is approximately 10% per annum). Delaying planning means you’ll need to save or invest a larger amount later to reach the same goal. Planning for your child’s education requires a goal-based, time-sensitive investment approach. As the goal draws nearer, your focus should shift from growth to safety and liquidity.

o Long-Term Stage (10+ Years to Go): Focus on growth through equity mutual funds or stocks, aligned with your risk profile. Leverage compounding by starting a SIP early. Also consider tax-efficient options like PPF for a boy child or Sukanya Samriddhi Yojana (SSY) for a girl child.

o Mid-Term Stage (3–2 Years to Go): Begin de-risking your portfolio. Gradually reduce equity exposure and move funds into hybrid or debt mutual funds, short-term bonds, or fixed deposits to protect gains and prepare for expenses like tuition and travel.

o Short-Term Stage (2–1 Year to Go): Prioritise stability and capital preservation. Most investments should now be in pure debt funds, avoiding any fresh equity exposure.

o Final Year (Less Than 1 Year): Ensure maximum liquidity and safety. Shift all funds to liquid mutual funds or high-interest savings accounts, exiting equities completely to avoid last-minute market shocks.

o Use a Systematic Transfer Plan (STP) to gradually move funds instead of shifting all at once. This reduces timing risk and ensures a smoother transition from risk to safety as the education goal approaches.

Diversify your investments across different instruments like debt, gold funds, liquid funds, etc. As the education goal gets closer, your investments should be in instruments that are easy to access. Avoid long-term lock-in products. Also, keep a small emergency fund aside to handle any surprise costs, so you don’t have to dip into the education fund. If you're unsure about how to manage this transition, take personalised guidance from a financial advisor.

To calculate your needed SIP investment amount, you can click: here.

● Goal 2: Wedding Planning: Weddings are emotionally and financially significant events, often involving considerable expenses. Be it your own wedding or your child’s, planning ahead can reduce stress and prevent the need for last-minute borrowing. If the wedding is 5 to 10 years away, you can start with equity or hybrid mutual funds through SIPs to benefit from long-term growth. As the event gets closer, shift your investments to more conservative instruments like short-term debt funds to protect the accumulated amount. Start by defining your expected budget, adjusting for inflation, and then work backward to determine the monthly investment needed to meet that goal comfortably.

● Goal 3: House Purchase Planning: Buying a home is one of the most emotionally and financially significant life goals. Whether it’s your first property or a dream upgrade, plan early to avoid over-leveraging. If your purchase is 5–10 years away, invest through SIPs in equity or hybrid mutual funds. As the timeline shortens, shift gradually to debt or liquid instruments to safeguard the down payment. Also, factor in associated costs like registration, interiors, and moving expenses.

● Goal 4: Holiday Planning: Whether it's a dream vacation to Europe or a family trip to the hills, holidays are better enjoyed when they don’t strain your finances. If your goal is just 2 to 5 years away, stay away from market volatility and focus on safer, short-term investment options. Recurring deposits, conservative hybrid funds, or short-term debt mutual funds are ideal for this timeframe. These ensure stability while providing better returns than a standard savings account. A planned approach ensures your travel dreams don’t turn into debt burdens. Begin with a rough budget and automate your savings through SIPs or recurring transfers aligned with your goal amount.

● Goal 5: Other Short-Term Goals (e.g., Car Purchase): For goals within 1–3 years like buying a car, laptop, or furnishing your home, focus on capital protection and liquidity. Short-term debt funds, recurring deposits, or conservative hybrid funds are suitable. Avoid equities due to the high risk of short-term volatility. Automate your savings based on your target amount and timeline.

● Goal 6: Long-Term Wealth Creation: Once your key life goals are mapped and protected, it’s time to build long-term wealth. This isn’t tied to a specific event but to creating financial abundance and independence. Allocate a portion of your surplus income into growth assets like equity mutual funds, direct stocks, or ETFs. Maintain discipline with regular SIPs and rebalance annually based on your risk appetite. Wealth creation is a marathon, only patience and consistency will get you there.

Step 5: Do Smart Tax Planning

Interwoven with each of these steps is tax planning. This is all about legally reducing your burden by judicious use of the provisions of the tax laws. Most individuals delay tax planning until the final weeks of the financial year, especially in March. This often leads to rushed decisions and missed opportunities. The smarter approach is to start in April, at the beginning of the financial year. This gives you enough time to assess your income, estimate your tax liability, and explore the best tax-saving options calmly and wisely.

Under the new tax regime, most common deductions like 80C, 80D, and HRA are not allowed. You benefit from lower tax slabs instead. However, if you have significant deductions, the old regime may offer better savings. So, always compare both regimes and choose the one with the lowest tax liability.

Capital Gain Tax Rule:

● Equity and equity mutual funds: LTCG: If held for more than 12 months, capital gains above ₹1.25 lakhs in a financial year are taxed at 12.5% without indexation.

STCG: If held for 12 months or less, capital gains are taxed at 20%.

● Debt mutual funds: Post April 1, 2023 tax changes, all gains are now treated as short-term, regardless of holding period and taxed as per the investor’s income tax slab rate. No LTCG benefit or indexation is available.

Step 6: Secure Your Legacy through Estate Planning

Estate planning isn't just about writing a will, it's about ensuring your assets are transferred smoothly and your loved ones are protected from future complications. A clear and legally valid will outlines how your wealth should be distributed and who will manage that process. Just as important is keeping nominee details updated across all financial instruments like bank accounts, insurance, mutual funds, and retirement savings. Appointing a trustworthy executor and, if needed, a guardian for minor children prevents court-appointed decisions that may not reflect your wishes. For more complex family or financial structures, consider setting up a trust to manage wealth distribution over time or care for dependents with special needs.

Equally vital is planning for incapacitation, something many overlooks. A durable power of attorney authorises a trusted individual to act on your behalf in financial, legal, or medical matters, especially if you become incapacitated, while health directives (like a living will) ensure your medical preferences are respected. Though India doesn’t have inheritance tax, your heirs may face liabilities like unpaid loans or capital gains on inherited assets. With proper estate and incapacitation planning, through wills, insurance, trusts, and regular reviews in every 2–3 years or after significant life events, you can safeguard your legacy and provide your family with peace of mind when it matters most.

The Financial Security You Deserve

Financial planning goes far beyond just starting a SIP. This step-by-step guide has been designed to walk you through every critical stage from building your emergency fund and getting the right insurance, to planning for retirement, children's goals, tax efficiency, and leaving behind a clear legacy.

By following this structured roadmap, you move from being unprepared to fully in control, ready to face life’s uncertainties with clarity and confidence. Whether it's today's expenses or tomorrow’s dreams, you and your family will be equipped with a solid, stress-free financial foundation.

-Sukalyan Halder & Akshit Bajaj

-Dayco India

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Not Just SIPs: A Step by step Guide to Financial Planning the Right Way

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