Financial planning is a step-by-step approach to meet one’s life goals. A financial plan acts as a guide as you go through life’s journey. Essentially, it helps you be in control of your income, expenses, and investments such that you can manage your money and achieve your goals.

  • The Benefits of financial planning

    Increase your savings

    It may be possible to save money without having a financial plan. But it may not be the most efficient way to go about it. When you create a financial plan, you get a good deal of insight into your income and expenses. You can track and cut down your costs consciously. This automatically increases your savings in the long run.

    Enjoy a better standard of living Most people assume that they would have to sacrifice their standard of living if their monthly bills and EMI repayments are to be addressed. On the contrary, with a good financial plan, you would not need to compromise your lifestyle. It is possible to achieve your goals while living in relative comfort.

    Be prepared for emergencies Creating an emergency fund is a critical aspect of financial planning. Here, you need to ensure that you have a fund that is equal to at least 6 months of your monthly salary. This way, you don’t have to worry about procuring funds in case of a family emergency or a job loss. The emergency fund can help you pay for varied expenses on time.

    Financial Freedom With adequate funds at hand, you can cover your monthly expenses, invest for your future goals and splurge a little for yourself and your family, without worry. Financial planning helps you manage your money efficiently and enjoy peace of mind. Don’t worry if you have not yet reached this stage. If you are on the path of financial planning, the destination of financial freedom is not very far away.

    Financial planning for life goals The importance of personal financial planning in India cannot be ignored. It is not just about increasing your savings and reducing your expenses. Financial planning is a lot more than that. This includes achieving your future goals, such as:

    Wealth creation The rise in the price of everyday items means that if you want to maintain or increase your current standard of living in the future, you need to create a sufficient corpus of wealth. You may also want to purchase a better car or a new house in the future. All this requires money, and it merely highlights the importance of wealth creation. It is possible to achieve these goals by carefully investing your money in the right avenues.

    Retirement planning Your retirement maybe 25 or 30 years in the future. But that does not mean you plan for it when you retire. To enjoy a happy and comfortable retired life, you need to start building your safety net right now. Planning at an early stage in life can help secure your future against financial uncertainties. Also, you invest lesser amounts if you start early and gain from the power of compounding which helps to build a large enough corpus over the 25-30 year period.

    Child’s education Education has become very expensive, not only in India but across the world. And in the future, this cost is only going to rise. This is why it is necessary to start planning from the moment your child is born. Calculate how much you wish to earn and start investing in long-term investment avenues that can help you achieve this goal. You can approach a financial advisor for advice if you are not sure how to proceed further.

    Saving tax Every year, you are probably paying a substantial amount as tax. But you can now lower your tax outgo legally. The Indian Income Tax Act provides various provisions for people to reduce their tax outgo. By planning your taxes in advance, you can identify the best avenues to invest your money and reduce your taxable income.

  • To tackle inflation
    The phenomenon of prices rising over the years is known as inflation. It is the steady increase in the price of goods and services over time. And if you are not careful, it can eat into your savings in no time. Here’s a simple example to illustrate its effect. Imagine a chocolate bar costs Rs. 10 today and you have Rs. 100. With this amount, you can buy 10 chocolate bars. Over the next one year, imagine you keep Rs. 100 in a bank that offers you an annual interest rate of 5%. At the end of the year, you have Rs. 105 with you. But over one year, let’s assume that the price of the chocolate bar increases to Rs. 11. This means you have to pay Rs. 110 to purchase the same 10 chocolate bars next year. But since you have only Rs. 105, you fall short of Rs. 5. This is how inflation eats into one’s savings. It reduces purchasing power over time, and you have to pay more money to buy the same goods.

    You can combat inflation by investing in avenues that offer you better returns over time. But for this, financial planning is critical. To create a backup fund.

    The future is uncertain, and anything can happen at any time. Here’s a scenario that highlights this point.

    Imagine a father who has taken an education loan to finance his daughter’s college education. At the same time, he is also saving money to fund his retirement that is a couple of years away. But suddenly, a medical emergency occurs in the family. Unfortunately, the lack of medical insurance coverage means he has to pay for medical expenses out of his savings. This depletes his retirement corpus and increases his financial burden.

    Many people face such situations. And while it is good to hope for the best, it is necessary to plan for the worst. A sudden job loss or an unexpected medical emergency can shake up your finances considerably. This is why you need to have an emergency fund to deal with such issues. Financial experts advise investors to keep an amount equal to 6 months’ salary as a backup fund. This can be invested in a liquid fund so that you can access the money quickly in case of an emergency.

    To create a retirement corpus
    Newer medicines and more significant advances in the medical field mean that people are now living longer retired lives. This is undoubtedly a good thing. You can enjoy more time with your family, explore your passions and dreams and travel around the world. But there’s one crucial question you need to consider: how can I fund all these expenses? You need to have an adequate amount of money to ensure you enjoy your retired life to the fullest. This is possible by having a financial plan that provides regular income post retirement.

    To manage your money in the best possible manner
    Satisfying the needs of your family members can be tricky. Your teenage son may want to go to a space camp during the summer while your oldest child is ready to go to college. In personal finance, planning is vital. It not only helps you understand the needs of different family members but also how you can achieve them. But for this, you need to manage your money in the best possible manner. For instance, parking your savings in a bank account is better than spending all of it. However, this is not the best way to deploy your money. In comparison, avenues like mutual funds could provide better annual yields. So, when you identify your family’s needs and make your money work actively to achieve them, you may expect to see good results.

  • Understand your current financial situation
    Determine the status of your current finances, viz., your income, expenses, debt, savings, and investments. This is the first step in financial planning, as it gives you a good sense of the state of your finances and ways to improve.

    Write down your financial goals
    Ask yourself: ‘what are the different financial goals I wish to achieve in life?’ Write them on a piece of paper. Don’t hesitate to put down any goal because no goal is too small or too big. However, make sure that your goals are specific. For instance, here are some achievable goals: ‘I want to purchase an SUV worth Rs. 13 lakh in the next 18 months’ or ‘I want to buy an apartment worth Rs. 80 lakh in the next 5 years.

    Look at the different investment options
    There are numerous investment options available to investors. From equities to treasury bonds, choosing the right investment is important because everyone has a different approach to investing which depends a lot on the level of risk they are ready to be susceptible to, that is the level of risk tolerance they have. Investors must do the required due diligence and choose the right investments and not do speculative bets for short-term gains. Or they can approach qualified investment advisors.

    Monitor your financial plan regularly
    The financial planning process does not end once you invest your money. You also need to monitor how the funds are performing regularly. If they don’t perform, you may need to replace them with better-performing funds. You also need to follow your plan because as you grow older, your goals and dreams evolve. For instance, your financial priorities may change after the birth of a child. Now, you need to accommodate the expenses and objectives of a new member of your family.

  • Types of Financial Planning
    There are primarily three types of financial plans that include:
    A short-term financial plan is determined for 1 year. This plan takes into consideration your current income and other financial resources at your disposal and your needs. A medium-term financial plan is determined for a time span of five years in mind. This takes into consideration, your career path, future income increment and growth prospect, and your needs. A Long-term financial plan is determined for a time span of five years and more. These are generally big money/ investment goals. This requires systematic planning, savings, expenditure control, tax savings and meticulously following the financial planning strategy and roadmap.

    Broadly, in technical terms, financial planning revolves around how well you do the following:

    Cash flow Management Managing cash flow, defined as inflow and outflow of funds, is crucial for your financial management. In simple terms, it is to keep a tab on your income and expenses. You need to estimate your present and future expenditure, accordingly, you need to create a roadmap to keep your expenditures under control and achieve your financial goals faster.

    Cash flow management also refers to creating a pool of emergency funds for unforeseen financial needs like health-related expenditures, or any kind of unplanned expenditure. For beginners, it will help them derive the amount of disposable income after meeting all the necessary expenditures.

    Investment funds Planning and management
    This is driven by your short-term and long-term goals and a roadmap to achieve those in a time-bound fashion. There is no denying that one needs to accumulate enough corpus of funds to meet high-value goals, such as buying a house, educational and marriage expenditure of children, etc. You must work towards building sizeable funds at different stages of your life by investing in various investment instruments early in your life.

    Insurance investment planning

    Insurance is your safety net for you and your family. In case of any unfortunate event, it is the insurance amount that will be a savior for your family after you. Insurance such as Life insurance, health insurance, home & vehicle insurance is some of the inevitable insurance that you should add to your life as a part of your financial planning as you cruise along with life. Insurance also acts as a hedge during market fluctuations and inflation and keeps you future-ready.

    Tax Planning and management
    This is a liability that you have to factor in in your expenditure to arrive at your disposable income. Tax exemption and tax liability minimization are of utmost importance to maximize your real income. You need to take the help of investment planners or tax consultants to invest in tax-saving instruments, through various government and private investment schemes. This way you also contribute to the development of the economy and infrastructure for the future and next-generation which include your children to make their lives better.

    Real estate investment planning
    The most sought-after goal of most people worldwide is to create a permanent shelter for them and their families. This is one of the most important goals of people who do not have a house of their own. Buying a house is a big investment and requires meticulous planning and a road map to achieve it. This is also a great tax savings investment under government tax exemption. Real estate can also act as an investment and future income stream, by investing in commercial estates such as shops, offices, second houses. All of these are capable of generating a stable future income stream for you and your family.

    Children’s future planning
    Children are your responsibility to give them a good life and security. You are the one who needs to give them a stable career, in terms of their education, higher studies, and marriage. Times are difficult and by no means, it is going to get easier in times to come. As a parent, you need to prepare your children against all odds and contribute as much as possible to ease out their lives when they grow up to offer them a kick start.

    Retirement planning management
    This is for you and to secure your and your spouse’s future so that you do get dependent on your children as much as possible and maintain your dignity as a parent. The last thing that all parents want is to live old age at the mercy of their children. All want to live their head held high till the last breath. So a secure old age inevitably calls for a secure retirement planning. A secure retirement planning in advance, early in your life is the key to a peaceful retirement without worrying about finances related to day-to-day and health-related expenditures. Taking health insurance early in your life goes a long way to reduce health expenditures later in your life.