Financial Planning – Concept, Basics, Compatibility, Importance, Benefits, Tips & moreLast Updated Date: Aug 30, 2023
When it comes to financial planning, the majority of people think do they need a financial plan or no?
For some people, financial planning is all about bank recurring deposits or systematic investment plans.
But if you want to achieve all your financial goals, then you need to do way more than just allocating savings hastefully.
Additionally, with such investments, you just end up making inefficient utilization of your finances.
If you plan to become rich or achieve all your financial goals, then you need to do way more things, so your money starts working for you.
Besides, your income salary or business income might just not be plenty. Here is where financial planning comes into action.
By having a financial plan, you can achieve a plethora of financial objectives. Additionally, you can build a contingency fund for some unforeseen situations that might pop up.
So you might be wondering what financial planning is?
Well, you can say a financial plan is a comprehensive picture of your current finances, goals, and some strategies that you have to achieve those goals.
Perfect financial planning includes a plethora of things, including details on your savings, cash flow, investments, savings, and some other essential aspects of your life.
About Financial Planning
Financial planning is a process that is ongoing, which will minimize your stress about money to meet your current needs.
Above all, financial planning helps you build a nest egg for your long-term objectives, including retirement.
It is essential as it allows you to maximize your assets. Above all, it assures you to meet your future objectives.
Additionally, it is just not for rich people around but for everyone who wants to ensure that their financial future is secure.
You can either make your own financial plan or take help from a professional.
As of now, it is relatively easy to get advice from financial advisors, all thanks to cutting-edge technologies, including Robo advisors.
In simple terms,
You can say financial planning is all about a holistic view to analyze your current and future financial goals. Thus, it allows you to achieve all your objectives in a proper manner.
Ideally, It is all about investing in perfect assets, tracking your expenses, and setting smart goals.
Above all, with the right financial planning, you can also create a generous retirement plan. People wonder if they have enough savings, then why do they need it.
But you must know that whatever you earn from your job and business covers your business expenses. And the remaining you put out into savings.
You assume that your savings will help you lead a comfortable life. But you need to know that future is unseen, and timing can change everything.
Above all, if inflation takes place, then it might just take up all your money. Inflation is nothing but a rise in the price of products and services.
For example, the product that you buy for Rs.100 today will cost Rs.110 tomorrow. So you can expect where it will reach till the time you retire.
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How to start Financial Planning?
Here is a step by step process on how anyone can do their financial planning without taking help of a professional.
Define your Financial Goal
The primary purpose of financial planning is to help you aim your financial goals. You can either have short-term, medium-term, and long term goals.
Additionally, you need to ensure that your goals are SMART, that is, specific, measurable, adjustable, realistic, and time bound.
Keep a Budget
Ideally, budgeting is a process of making a balanced strategy on how you can make the most of your hard earned money.
Ideally, in simple terms, a budget is nothing but a summary of potential income or expenses for a specific period.
Above all, it will help you keep track of your costs and also ensure you don’t have excess debt.
No doubt, there are a plethora of budgeting apps available out there, but you can just start jotting down something on a paper.
Have a Contingency Reserve
One of the most essential elements of a unique financial plan is to build an emergency reserve. You can also call it is a contingency fund.
Life is full of uncertainties. You never know what tomorrow holds. This fund will help you to pay for unseen expenses, including hospitalization, loss of a job, etc.
Basically, a contingency fund is all about saving your six months of a monthly expense.
Key is Asset Allocation
The base of financial planning is asset allocation. You can achieve all of your financial goals with the perfect mix of equity and debt.
Additionally, you need to know that you don’t have so much time for the market to recover when you get old.
Review your Financial Plans every now and then
When you regularly monitor your financial objectives, you can enhance the possibility of you fulfilling your goals. It can also help you adjust changes, if any.
Additionally, you can also keep a check if these investments can help you in achieving your objectives or not.
How should you do Financial Planning?
If you don’t know where and how you spend your money, then you surely need to have financial planning.
In the current world, people don’t understand how they use up their monthly salaries. In the long run, impulsive buying and lack of budget lead to a plethora of problems.
Hence you can’t achieve your financial goals if you fail to keep a tab on your expenses. You also need to have financial planning if you have several liabilities.
All of us aim to lead a better lifestyle that gives us comfort. To fulfill all our goals, at times, we end up borrowing money.
Hence when you have a financial plan, you can avoid this mess. Additionally, you need a financial plan if you don’t have a road map of achieving your financial dreams.
You need a blueprint to achieve your financial objectives; then it helps you in giving a shape to your goals.
Importance of Financial Planning
The main agenda of financial planning is to help you achieve your dreams and aspirations. Additionally, financial planning helps you in planning your retirement.
It is relatively easy for you to plan your expenses when you have a regular income, but once you stop earning, then things become quite challenging.
Hence you can make your life post retirement quite comfortable if you have enough savings and investment. Furthermore, it helps you in buying your dream home.
When we start earning, we have some of the other goals, which are, either to have a successful career or to live in a beautiful house loaded with amenities.
If you have a financial plan, you can quickly achieve all your objectives.
Benefits of Financial Planning
Here are the various benefits of Financial Planning –
Enhance your Savings
If you don’t have a financial plan, then you might not be able to save money. Above all, it is the most efficient way.
You can get a great deal of insight into your financial income and expenses when you have a financial plan.
Additionally, when you have a financial plan, you can also cut down on your costs efficiently. In the long run, it enhances your savings.
Have a better Standard of Living
The majority of the people assume to think that they have to compromise their standard of living if they keep on paying EMIs from time to time.
On the flip side, if you have a perfect financial plan, then you don’t need to compromise on your lifestyle. Hence, living in comfort, you can quickly achieve your financial goals.
Be ready for Emergencies
All of us agree to one point that life is unpredictable and you never know what tomorrow holds.
Hence, one of the essential elements of financial planning is to create an emergency fund. Above all, emergency funds can help you pay different expenses on time.
Have peace of Mind
When you have adequate funds in hand, you can cover almost all monthly expenses. Without any stress, you can invest in your future goals.
Above all, financial planning helps you in managing your money correctly. Lastly, you can have peace of mind.
How to make a Successful Financial Plan? – Financial Planning Tips & Strategies
Here, we will discuss various tips & strategies which can help you achieve your financial goals with a stipulated timeline –
Analyze your Existing Financial Situation
You need to understand the status of current finances, including your income, debt, expense, investments, and savings.
This is a crucial step in financial planning as it gives you an idea about your current situation. Based on this, you can learn how to improve the situation.
Write down your Financial Objectives
Everyone has different financial objectives, so don’t think your goal is too small or too big. All you need to do is write these goals and ensure they are achievable.
Look for Diversification
There are a plethora of investment options available to investors.
For example, if you want to invest in mutual funds, then you can get at least 2000 possibilities. Different funds allow you to achieve other goals.
Use the Right Plan
Based on your financial goals; you can choose the financial plan. It can include everything from your age, objectives, risk appetite, etc.
If you don’t know what plans suit you, then you can consult a financial advisor. These certified professionals can help you make the most of your financial plan.
Fundamental Rules for Financial Planning
Here are the various rules which you must follow before making a financial plan for yourself or others.
Manage your Money
It is undoubtedly not boring to manage your money.
Additionally, you need to know that there is no rocket science in managing your money, and also, you don’t need to come from a financial background.
The first step to money management is saving. If you want to be financially independent, then you need to start saving money.
To fulfill all the goals, you need to have money. But don’t be in a hurry to meet them, or else you might get into a debt mess.
Hence, you can achieve your financial goals when you complete your financial obligations.
Keep your Expenses Widely
You are most likely living way beyond your means if you struggle for money even before the paycheck arrives.
No doubt unplanned expenses come up, but these will leave you with no money for necessities. But you don’t need to stress at all as with a planned budget you can solve everything.
With an account, you can see how much money comes in and goes out.
Have a Personal Balance Sheet
When you have a personal balance sheet, you can check what you own and what you owe. It is a great tool to take your finances to another level.
You can see your personal net worth with differences between your assets and liabilities.
Additionally, you can list down your assets, including your bank balance, investments, etc. you can get your net worth by subtracting liabilities from the support.
Don’t lose hope if your net worth is negative; instead, work hard to make it better. Your net worth will keep on increasing when you repay all the loans on time.
Cover your Risks
You need to first understand that both your money and property are vulnerable to risk. Such risks lead to loss of income. Besides wealth creation, you also need to preserve for wealth creation.
Plan your Estate
You need to believe that all of us have an estate, and it can include anything from your house to a car.
Furthermore, you need to decide what will happen when you leave the world. All you need to do is ensure that the right person gets the right asset.
Financial Planning – Conclusion
A financial plan is all about a person’s financial goals. It helps in creating a strategy to achieve these goals. Besides being comprehensive, the financial plan must also reflect a person’s situation.
All we say is that you must track your money and see how much you are spending where.
When you have an accurate picture of your financial plan, you can direct your finances to savings or pay loans, if any.
An immediate goal is developing a budget, while a retirement plan is a long-term plan. Hence with a financial plan, you can get a balance between inflow and outflow.
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