6 Components of Financial Planning

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In this article, we are going to discuss the various Components of Financial Planning Process to get the complete picture of one's financials.

Key Elements of A Financial Plan


In this article, we are going to discuss the various Components of Financial Planning Process to get the complete picture of one’s financials. Effective Financial Planning involves far more than balancing your bank statement on a monthly basis. Major key elements are Cash-flow management, Investment management, Tax planning, Insurance assessment, Retirement planning and Estate planning.

What is Financial Planning?

Road Map of Financial Planning
Road Map of Financial Planning
  • In our earlier article, we have discussed that Financial planning is the on-going process to help you make prudent decisions about spending, investing, and transferring your income and assets to help you achieve your financial goals.
  • Meaning, Financial Planning is nothing but identifying the sources of the funds and investing these funds in suitable policies, which ultimately helps in achievement of the financial goals.
  • Financial Planning is an on-going process because your goals change, life events occur, income changes. It can be a challenging task to understand and manage all the dynamics, perform the analysis, and make non-emotional financial decisions, because of unpredictable changing of domestic and global economy and so many constantly changing variables.

How Do You Achieve Financial Clarity?

By creating a ‘life plan’ that integrates your visions, values and motivations – all unique to you and your lifestyle – with your financial goals, realities and expectations. Here are important components of a Financial Plan.

6 Components of Financial Planning
Components of Financial Planning

6 Components of Financial Planning

1.Cash-Flow Management
  • To truly understand your current assets, liabilities, and net worth; it is important to identify – in writing – the status of your personal and professional income and expense balance sheet.
  • We include goal planning as part of this step because setting realistic goals and achieving them is highly dependent on your ability to save for those goals.
  • Other aspects of cash flow management includes the debt elimination plan, if needed, as well as a comprehensive savings plan.
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2.Investment Management
  • When most people think of financial planning, they may think of investing. Many people ask, “What is the latest hot stock?” or “What is the best mutual fund?” Studies have shown that those are bad questions because investing is not about the latest stock or timing the market.
  • Investing is a strategy that takes your goals, your risk tolerance, and your timeline into consideration. Then, developing the best investing strategy to meet those goals. Your investing strategy should be the foundation for meeting your retirement goals, education goals and other long term goals.
  • If done properly, your portfolio strategy should include an asset allocation mix that minimizes risk through a global and well-diversified (properly correlated) set of assets such as stocks, bonds and other alternatives.
  • The asset mix and correlation factors of the portfolio are personalised to your specific needs and are key to the long-term success of the portfolio.
3.Tax Planning
  • In order to maximize and preserve your investment returns, an eye toward tax management is crucial. There are number of tax-reduction strategies and methods for generating tax-free income and wealth transfer considerations; which can be achieved by way of tax planning.
  • No matter what your age is, one should consider, understand and implement this in a proactive manner.
  • For example, Debt Funds can benefit you more when held for more than 3 years than bank fixed deposits from tax perspective.
4.Insurance Assessment
  • An important and often overlooked component of financial planning is to evaluate the kind of insurance you need to protect yourself and your assets with and your loved ones. Insurance types can include life, disability, health, vehicle and property insurance to name a few.
  • Depending on your stage in life, your insurance needs (risk management needs) will change and evolve.
5.Estate Planning
  • No matter your age, estate planning is an integral component of long-term financial planning. You can control the distribution of your assets, both during life and upon death, with the right estate plan structures in place for your unique circumstances and wishes.
  • Furthermore, keeping your estate plan current is just as important as creating it in the first place.
6.Retirement Planning

Retirement planning helps you set a goal for, when you want to retire and your income and lifestyle objectives during retirement. Your advisor can determine, if your current savings are on track and provide guidance on strategies to help achieve those goals. Retirement Planning also helps you answer questions, such as –

  • How to manage my retirement corpus?
  • Is my retirement corpus enough?
  • Can I retire early?
  • How to get regular income?
  • Should I invest in risky assets after retirement?
  • How to increase my pension?

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