In this chapter, we will understand what is financial planning, its benefits and what are the various elements of a financial plan.
What Is Financial Planning?
Financial planning is a step-by-step approach to meet your financial goals. It helps you to manage, organize and control your finances and guide you throughout your financial journey.
For example, if you need Rs 10 lakhs for your wedding next year, then you must plan your finances in a way so that you can save up for it in a systematic and organized way. This is where financial planning becomes essential.
What are the Benefits of Financial Planning?
1. Manage, Organise and Grow Your Money
Planning your finances well can help you manage, organize and grow your money. A good financial plan will give you great insights on your income and expenditure and by practising restraint on non-necessary expenses, you can grow your savings in the long run.
2. Stay Prepared for Emergencies
Creating an emergency fund is an important aspect of financial planning. Emergency funds will provide the much needed financial cover when sudden, unexpected emergencies occur. It is advised that you keep at least 6 months worth of your monthly salary aside in your emergency fund.
3. Better Standard of Living
A well-balanced financial plan will ensure you follow a monthly budget, pay your bills and EMIs, build an emergency fund, save at least 20 percent of your monthly income and spend the rest on your needs and wants. This will help you lead a better life without stressing about the future.
4. Plan for Life’s Goals
Every major life goal requires money and financial planning can help you fulfill all your life goals. From getting married to buying a house, to saving up for your kids’ education to planning for your retirement - all these goals can be achieved through proper and timely planning of your finances.
5. Tackle Inflation
Inflation is the gradual increase in the prices of goods and services over a period of time in an economy. For example, goods that cost tens of rupees back in the 1950s, cost hundreds or even thousands today. So accounting for inflation and investing in assets that will yield better results over a period of time can help you in the long run. And financial planning can be a great tool to help you achieve this.
Components of a Financial Plan
1. Assessment
Understanding and assessing your current financial situation is important to get a good sense of your financial health and make a financial plan to grow it.
2. Goals
What are your short-term and long-term financial goals? Make sure to make SMART (Specific, Measurable, Achievable, Realistic, and Timely) goals and work towards achieving them. Your financial plan should clearly state your financial goals and aspirations.
3. Plan Development
Once you have assessed your financial health and made specific goals, then comes the phase where you develop a financial plan to meet your financial goals. The plan must clearly lay out the sources of income, list of expenses and the amount you wish to save and invest each for a specific period of time.
4. Execution
A good financial plan can only be helpful if it is executed properly. Ensuring that all financial activities are in sync with the financial plan will help you stay on track with your overall finances. So execution of a financial plan is as important as making a plan.
5. Monitoring and Reassessment
A financial plan needs constant review and monitoring. Each aspect of the plan needs to be updated regularly to ensure that the execution and the plan on paper are always in sync and any changes from the plan need to be recorded.
No financial plan is perfect on day one, but constant monitoring and reassessment will help make the plan best suited to your financial needs.
