Financial Planning is the process of meeting your various life goals, through disciplined and systematic arrangements of your personal finances.
It is as simple as planning for a vacation in advance or planning our to-do list for the day. Financial planning should be the core essence of our lifestyle.
It helps in giving direction and destination to your investments. It helps in managing financial emergency situations and also helps in ensuring “Peace of Mind”
The old saying “Uncertainty” is the only constant” would fit right in the current world scenario. However, this uncertainty makes life vulnerable for us and for our
dependents. Luxurious lifestyle expenses have observed steep increase in recent times. Individual debt burden through credit cards and various loans are increasing
at a steady pace. Maximum time and effort of individuals is consumed in arranging finances or managing finances for heavy EMIs. Their precious time could be more
productive, if invested in maximizing income.
This can be achieved by systematic process of financial planning. Financial planning not only helps in reducing unnecessary expenses but also helps in lowering EMIs.
It enables one in becoming an investor where one will be earning interest rather than paying it through EMIs.
Financial planning can be done at any age. “Financial planning is good for the younger generation” is a Myth. At any stage of life an individual can go for
financial planning. Financial planning can be done for short term, medium term & Long term. Basically, financial planning can help individuals in any goal planning.
Be it a new car purchase, estate planning, children’s education, children’s marriage or retirement planning.
Financial Planning is a very simple process and can be done with assistance of a Financial Planner.
The prerequisites for financial planning process are:
An individual should be aware of his current financial balance sheet.
An individual should be clear about his life’s financial goal.
An individual should be aware of his current and future liabilities.
If an individual is aware of afore mentioned prerequisites, then he is ready for financial planning.
There are few things which an individual should avoid while structuring financial plan:
Don’t focus on product or investment vehicle while finalizing prerequisite for financial planning.
Don’t hide anything from your financial planner. Be it your ancestral property, bonuses or any additional income generating from different sources.
Don’t hesitate in putting queries and taking spouse’s help for determining any financial parameter.
Don’t create an unnecessary squeeze on income because in that case financial planning will be short-lived and will not be of any use.
Don’t create unrealistic goals, it’s important to understand that financial planning not only helps in achieving financial goals but it also helps in wealth creation.
Don’t fix financial planning with a preoccupied mindset. In such a scenario, goals setting and results will become unrealistic.
Advantage of financial planning
Income: It's possible to manage income more effectively through planning. Managing income helps you understand how much money you'll need for EMI payments, other monthly expenditures, savings, and for your future goals.
Cash Flow: Increase cash flows by carefully monitoring your spending patterns and expenses. Tax planning, prudent spending and careful budgeting will help you enjoy more of your hard-earned income.
Capital: An increase in cash flow, can lead to an increase in capital. Allowing you to consider investments to improve your overall financial well-being.
Family Security: Your family's financial security is an important part of the financial planning process. Having the proper insurance coverage and policies in place can provide peace of mind for you and your loved ones.
Investment: A proper financial plan considers your personal circumstances, objectives and risk tolerance. It acts as a guide in helping choose the right types of investments to fit your needs, personality, and goals.
Standard of Living: The savings created from good planning can prove beneficial in difficult times. For example, you can make sure there is enough insurance coverage to replace any lost income in case a family breadwinner is unable to work.
Financial Understanding: Better financial understanding can be achieved when measurable financial goals are set, the effects of decisions understood, and results reviewed. Giving you a whole new approach to your budget and improving control over your financial lifestyle.
Assets: A nice 'cushion' in the form of assets is desirable. But many assets come with liabilities attached. So, it becomes important to determine the real value of an asset. The knowledge of settling or canceling the liabilities comes with an understanding of your finances. The overall process helps build assets that don't become a burden in future.
Emergency: There is an old saying, “Saving for the rainy day”. Sudden financial changes can throw you off track. It is good to have some investments with high liquidity. These investments can be utilized in times of emergency.
Limitation of Financial Planning
Error in Data Collection: Primary data needs to be accurate and if an individual skips even a minute piece of information it can affect financial planning report.
Time Factor: Time is an important factor of financial planning and miscalculation and assumption related to tenure or horizon can affect financial planning reports.
Knowledge of financial planner: If a Financial planner is not well equipped or has limited understanding, there is a high probability of data miscalculation and inaccurate results.
Inflation: After considering inflation as an important parameter, still there are chances of wrong calculation. Inflation is not in hand of individual or financial planner, but it affects majorly to financial planning.
Accuracy: It’s the biggest limitation of financial planning. The best of financial planner can also go wrong, but an experienced and well-informed financial planner can create cushion while planning. This is crucial in ultimate achievement of goals.
No one can be 100% accurate but if planning is achieved with 80% accuracy also it is very good planning on part of financial planner.
Review and changes in goals: Whatever you assume or decide initially while making a financial plan, it is bound to change in next 5 to 10 years because of changes in lifestyle or changes in preferences. It is advisable to relook, or revisit financial planning report every 5 years.
This is absolutely true that no one can see the future but if an individual can manage and plan in present then there are high chances
that he/she will be able to manage future very comfortably. Finances managed in better way can change life and living standards. A first step taken towards
financial planning can help in ease of life and can give peace of mind. A well-planned business with help of good budgeting and control over finances can do
miracles. Similarly, well planned individual finances can also do wonders.
It helps in buying best financial product with less risk and better returns. It also helps in proper asset allocation for future needs.
Take a small step towards Financial planning today and be assured of your unseen future without any worry.
Disclaimer: All views expressed in articles are of Mr. Rohit Khandelwal. He is AMFI & IRDA registered advisor.
The author doesn’t hold any responsibility towards any accuracy of data or parameter. For any investment advice,
kindly call your registered financial advisor and before investment, kindly read offer document carefully.
Moneymatters and its employees don’t guarantee any returns as assured returns.