Financial planning is an ongoing process and set of actions which enables you to take structured and sensible decisions. This objective is to help you meet your financial obligations and goals. This also helps you deploy your money to achieve your life goals .
Financial Planning is not :
- A one time product you buy from market which can help you achieve everything.
- Is not one time investment you make to grow your money.
- Is not about buying products like pension planner or structured Retirement income planner
All these are just small components of a financial plan. But, financial planning is a continuous exercise which ensures you make right financial decisions at different moments in your life.
What is the Purpose of Financial Plan?
The main purpose of Financial planning is to help an individual or a family to align their finances to their lifestyle requirements.
- A good financial plan helps individual baseline their finances and set up a path of financial management. This is done so that individual lifestyle goals can be achieved.
- A good financial plan builds and forecasts your future financial requirements to meet your long term goals. It further suggests an actionable plan to achieve them.
Benefits of Financial Planning:
- Increased probability or possibility of financial security. Since, you have more visibility into impact of financial decisions.
- Gives a holistic view of your financial decisions and they impact your goals. This in turn helps you make the right decisions.
- Aligns your Financial decisions to long term and short term goals, ensuring you do not miss on any of them.
- It helps you make course correction in changing environment like economy or your personal financial position etc.
Key components of a Good Financial Plan
- Financial Statement analysis and cash flow analysis/budgeting.
- Investment planning including which assets to invest in to get better returns**.
- An optimal and balanial portfolio design.
- Tax Planning to ensure that you are managing your taxes well.
- Risk Management to ensure your have back up plans when things do not go as per plan.
- Retirement Planning for a secure and comfortable after-retirement life.
- Estate Planning (this may be optional).
As shown above, Financial planning process broadly consists of 4 crucial Components:
- Discovery phase
- Planning phase
- Sync planning with long term goals
How to create a Good Financial Plan? Detailed steps
- Review your income, assets and liabilities. Where the money comes from and where it goes?
- If you are married, do this financial exercise jointly with your partner.
- Check if you have emergency fund in place , if not, get one in place right now.
- Check if you have adequate insurance, if not, get properly insured.
- Do you have retirement plan ready, if not actively work on it.
- List down your Lifestyle/other important goals like travel, marriage, kids education etc.
- Create a complete financial plan to meet financial obligations for each of these goals.
- Keep reviewing your goals and plans.
Hope you liked these Personal finance tips. Some practical ways to create a good financial plan. Do you wish to add any other unique ideas?
Remember, if you have clear goals in mind, it becomes easier to achieve them. Same applies to financial goals as well. Plan wisely to live a healthy financial life.
How important is financial planning to you? Are you a Do-it-Yourself (DIY) person? Or you feel its better to consult a financial advisor? Do express your views, if any.