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Chapter 4.2: What is Financial Planning?
Money is very important, as materialistic as it may sound. Without it, you can’t access to even the basic necessities in life, forget about the comforts and luxuries we dream about.
Making money is still comparatively easier than maintaining it or doubling it. It is not just about getting a stable job and earning; it has got much more to do with managing your earnings well and saving it for the future. And if you have bigger aspirations, then investments are a must.
All this requires financial planning. Let’s look at what it is all about:
What is financial planning:
It is the act of managing your income; setting your financial goals and allocating your assets across investments while keeping in mind your limitations and requirements.
Differs for everyone:
Financial planning may mean different things to different people. This is because the end goal may differ. For you, it may mean planning investments to provide security during retirement. For another, it may mean planning savings and investments to provide money for child’s college education.
For someone else, it could mean ensuring a steady secondary source of income. Financial planning may even mean making career-related decisions or choosing the right insurance products. In reality, financial planning is the process of meeting financial goals through the proper management of finances.
Not just saving :
Again, simply saving money is not enough. It has to be invested in the right financial products to ensure their value increases with time. This is even more imperative in a country like India where inflation remains high. This price rise eats into the value of your money. So, Rs. 100 may not have the same value tomorrow.
For this reason, investment is a must. Financial planning helps you here too. Once you have an idea about your goals, financial and investment planning can be undertaken to understand where you stand currently and how to reach your final goal. Planning can thus be done by anyone with a clear assessment of one's inflow of funds and the goals that need to be achieved from time to time.
Financial planning process:
Financial planning is important because it guides and controls the financial decision making process. While making a financial plan, your objectives and constraints are included so that it represents the long-term roadmap. Planning is a dynamic process. So, if there are any changes in your circumstances, they can be incorporated into the financial plan.
It, thus, consists of the following activities:
- Assessing present assets and resources to understand the current situation.
- Setting goals and objectives – both in terms of returns and risks.
- Determining constraints and financial planning areas like taxes, legalities, time horizon, liquidity, as well as unique circumstances that may differ from person to person.
- Determining appropriate plan and strategy to achieve financial goals.
- Evaluating the plan regularly.
- Adjusting and modifying the plan if there is a change in conditions.
Roadmap to stability:
It is all about preparing a sequence of action steps to achieve a specific financial goal. A financial plan is a roadmap to achieve your life's financial goals. It is like a map, where you can always see how much you have progressed towards your projected financial goal and how far you are from your destination. .
Saving money right:
People often have a misconception that financial planning is about saving more and spending less, but that is not the case. It is more about saving the right amount so that future goals can be met. The objective of financial planning is to ensure that the right amount of money is available in right hands at the right point of time in the future to achieve the desired goals and objectives.
It, thus, provides direction and meaning to your financial decisions, and allows you to understand how each financial decision you make affects other areas of your finances. .
A key part of financial planning is risk profiling. This includes analyzing your current situation and likely future scenarios to understand your financial limitations. Using this, you can determine how much risk you can take.
For example, you have high liquidity needs and many dependents, you cannot take high risks. This would be especially so if you did not have a big contingency fund to help you in emergencies. Financial planning thus helps you give perspective to your limitations and capabilities.
Financial planning consists of a variety of things. All these ought to be planned keeping in mind your situation in life and your needs. In the next section, we look at the broad areas in which financial planning can be undertaken. Click here
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