What Is Financial Planning?
Whenever we hear the term financial planning, often many financial related questions pop-up in our mind. If you have similar questions given below in the image and you are yet to find the answer, then you need to go through the financial planning process.
What Is Financial Planning?
Financial Planning is an ongoing process to help you make logical decisions about money that can help you achieve your financial goals in life. Here, we need to focus on two words, that is PROCESS and an ONGOING process, which is further explained below–
- Financial Planning is a PROCESS:
It is a process, not a product. It is the long-term method of wisely managing your finances. Financial Planning is not about zeroing on which stock to buy, it is more about understanding if stock investments is even needed at all or not.
- Financial Planning is an ONGOING process:
It is not a one-time exercise. It is a planning till the end of everything, so it does require a lot of assumptions (both about your requirements and the market) which can change very frequently. As these assumptions change, so should your Financial Plan.
- Example: In your Financial Plan, you planned for 1 child but you had twins. Happy Moment..!! But, your Financial Plan needs to change completely to include 2 children.
- In more technical terms, Financial Planning is the process of estimating the capital required for your goals and determining it’s current & future competition. It is the process of framing personal financial policies in relation to monthly expenses, investment and administration of funds.
- 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.
- Therefore, in order to start today for achievement of the financial goals tomorrow, one has to think over various important aspects such as spending, saving, investing, planning, etc.
- There are various ups and downs as well, which one might come across unseen, preparing today for such scenarios in advance, will help in keeping calm and utilizing the resources in best possible way.
Thus, it is a road map on which one may walk considering all the possible aspects, predictions and necessary assumptions which will ultimately lead to satisfactory life with no stress level. As you would not have to worry on the financial needs, since the same would be taken care of by then.
Objectievs of Financial Planning
Personal Financial Planning has got many objectives:
1.Determining Current Financial Status
First and most important objective of Financial Planning is to understand what is your current financial status. Questions like below need to be answered-
- What is my current Net-Worth?
- How much is my yearly average Savings?
- Am I spending too much?
- How should I plan my household budget?
- How is the quality of my current investments?
2. Determining Capital Requirements
Second most important objective is to determine how much money I need for my future Financial Goals? Fulfillment of this objective will depend upon factors like value of current assets, annual savings, identification of short & long term goals and long-range planning. Capital requirements have to be looked with both aspects: short- term and long- term requirements.
3. Framing Financial Policies :It is with regards to expense control, borrowings & investing, etc.
4. Risk Management : Financial Planning also plan for probable risks attached to your money such as Life Risk, Health Risk, etc.
5. Determining Portfolio structure :The portfolio structure is the composition of investments i.e. the asset allocation to various investment options. This includes decisions of debt-equity ratio, both for short-term and long-term.
6. Maximum utilization of scarce resources : A Financial Plan also ensures that the scarce financial resources are maximally utilized in the best possible manner, at least cost, in order to get maximum returns on investment.