Financial Planning

What is Financial Planning?

Financial planning is an activity to manage your finances effectively. The objective of financial planning is to create sufficient assets and investments so that your goals can be adequately fulfilled. Under financial planning, you start by listing your income and expenses. You create a budget of your expenses and deduct them from the income that you earn. This gives you your disposable income.

The disposable income is how much you can save. The meaning of financial planning includes assessing your existing assets and liabilities and then using the disposable income to create funds for your financial goals. It also includes debt management and tax planning so that you can create a suitable financial portfolio and achieve financial independence.

Financial planning is an important activity to help you control your income, expenses, liabilities, savings and investments. It helps you take control of your money efficiently.

The quote, ‘failing to plan is planning to fail’ may apply to money matters. Financial planning may be like creating a roadmap for your economic well-being. It may allow you to allocate your money in a manner that enables you to achieve your life goals. And ultimately, life goals may be anything you want, immediately or in the long run. Having a financial plan may help you achieve your goals while living a quality life.

Read on to understand how to go about planning your finances.

Importance of financial planning

Financial planning is like a stepping stone for your journey towards financial independence. It is important for the following reasons -

Helps in goal-based saving and investing

When you plan your finances, you start by identifying your goals for which you need to save. Once you know your goals, you know the corpus needed to fulfil them and their time horizon. This helps you save for specific goals and create a corpus that aligns with your time frame.

Prepares for emergencies

Emergencies can strike anytime, and when they do, they might require a financial backup. Financial planning helps you plan for emergencies so that when they strike, you are financially prepared.

Ensures retirement readiness

One of the financial planning goals is creating a retirement corpus. When you start to plan for your retirement from a younger age, you can save small amounts and create a decent retirement corpus over time. When you have a retirement corpus at your disposal, you can retire with ease and comfort.

Offers peace of mind

Lastly, financial planning gives you peace of mind by planning for your goals and emergencies in advance. When you plan your finances, you prepare for every need and responsibility of your life so that you are financially capable of fulfilling your obligations without strain.

Benefits of financial planning

There are different benefits of financial planning. Some of these benefits are as follows -

• Different types of planning for different financial needs

  There are different types of financial planning activities for complete management of your finances. For instance, financial planning includes budgeting, child planning, retirement planning, estate planning, etc. These different activities ensure that all your financial needs are fulfilled.

  
  

• Complete clarity

  When you start making a financial plan, you get complete clarity of your expenses and income. There is no guesswork involved, and you can make informed decisions.

  
  

• Better financial management

  Financial planning helps you minimise or cut down unnecessary expenses, take the right amount of debt, plan taxes, and manage your finances efficiently so that you can save more.

  
  

• Risk management

  With financial planning, you can identify your risk tolerance level and then plan your investment accordingly.

  
  

• Debt management

  Financial planning allows you to stay in control of your debts, helping you cut down on unnecessary interest payments and build a stronger credit score over time.

  
  

Types of financial planning

As mentioned earlier, there are different types of financial planning. Here’s a look at some of them -

• Emergency planning
  Emergency planning means setting aside funds for different types of emergencies that you might face.
• Retirement planning
  This includes planning for and creating a corpus for your golden years when you are actively working.
• Goal planning
  Goal planning includes identifying your financial goals, their timeline, corpus required, etc. and planning for them.
• Child education planning
  This type of financial planning activity is undertaken by parents who want to create a secure corpus for their children’s higher education.
• Estate planning
  Estate planning means planning to create properties and assets which you want to leave behind for your loved ones.
• Tax planning
  Tax planning involves identifying your tax liability and making use of tax-saving provisions to minimize the liability to save more.
• Budgeting
  Budgeting involves identifying your income and expenses, minimizing unnecessary spending, setting up allocations for specific expenses, and saving.
   

How to Plan Your Finances?

Financial planning for your personal finances can consist of several steps crucial to achieving your financial goals. Here's a closer look at some of the possible steps involved:

Step 1: Assess your current financial situation

To begin with, you may gather all information related to your income, assets, debts, and liabilities. This may give you a clear picture of your current financial situation.

Step 2: Identify your goals

Next, you may ask each member of your family to list their short-term and long-term financial goals. You may prioritise each goal and set a time frame for achieving it. Quantifying each goal may help you determine how much money you need to fulfil them.

Step 3: Identify financial gaps

Once you've assessed your current financial situation and identified your goals, you may calculate financial gaps, if any. This may help you determine the investments to cover the shortfall.

Step 4: Develop your financial plan

You may review your investment planning and check available investment options. You may determine which instrument(s) or a combination thereof suits your needs and corresponds with your investment time frame.

Step 5: Implement your financial plan

You may gather the necessary documents, open necessary bank and trading accounts, liaise with brokers, opt for suitable insurance plans and start investing. In short, you need to duly implement the financial planning and strategies that you have created.

Step 6: Regularly review your plan

Financial planning may be an ongoing process that requires periodic review, ideally every six months or after a significant life event. This may allow you to make any necessary revisions to your financial situation, goals, and investment time frame, based on the performance of your investments.

What Exactly is a Comprehensive Financial Plan?

A comprehensive financial plan is a holistic plan which includes budgeting, tax planning, goal planning, and other types of financial planning activities so that every financial aspect is taken care of. Under a comprehensive plan, you assess your income from all sources, identify every type of expense, know your goals and then gauge how you can use your money to meet your responsibilities.

It is necessary to have a comprehensive financial plan so that no financial aspect is left behind, which might later cause a strain. .

How To Do Successful Financial Planning?

For successful financial planning, here are some basic steps –

1. Find Out Your Disposable Income

   As you begin your financial planning, you need to know the disposable income that you have, which you can allocate to savings. The disposable income is the income minus expenses.

   To keep your expenses low, make a budget. Weed out unnecessary expenses so that you can save more and invest more.

   
   

2. Identify Your Goals

   Figure out your financial goals. Some might be planning to buy a home, set aside a corpus for your child’s higher education, go on an international trip, buy appliances for your home or gadgets for personal use, plan for retirement, etc.

   List down your financial goals and prioritise them. Find which goals are a priority and which can be fulfilled after some time. List your goals in ascending order so that you know your investment horizon.

   
   

3. Assess Your Risk Appetite

   Once your goals are identified and you know your disposable income, assess your risk tolerance level. This would help you pick the right investment avenues for your portfolio.

   Usually, there are three main types of risk tolerance levels – aggressive, moderate and conservative.

   Aggressive risk refers to a high tolerance for risk and a willingness to pursue potentially higher returns. Aggressive investors usually invest in high-risk assets such as stocks and are comfortable with market volatility. They have a long-term horizon for wealth creation and are less concerned with short-term market fluctuations. However, it's important to note that aggressive investing carries a higher potential for significant losses.

   Moderate risk falls in between aggressive and conservative risk levels. Moderate investors are comfortable taking moderate risks and aim for a balance between wealth creation and stability. They may usually invest in a mix of assets like stocks, bonds, mutual funds, etc., with a moderate tolerance for market volatility. This approach allows for stable growth while providing a certain level of protection against market downturns.

   Conservative risk refers to a low tolerance for risk with a preference to preserve wealth over seeking high returns with higher risks. Conservative investors are risk-averse and prioritise capital preservation. They usually invest in low-risk assets like government bonds, fixed-income securities, or money market funds. This approach offers greater stability and lower volatility, with typically lower potential returns over the long term.

   
   

4. Create An Emergency Fund

   Before you start investing, set aside a part of your savings towards an emergency fund. This fund would come to your aid during emergencies and would not disturb the other savings that you have.

   Life insurance plans can help you create an emergency fund against unforeseen contingencies. You can also create a fund in a liquid investment avenue, which can be redeemed instantly.

   
   

5. Allocate Your Savings To Different Assets

   Invest your disposable income towards different types of assets based on your risk appetite and investment horizon. Mix and match different instruments for a diversified portfolio.

   
   

6. Plan Your Taxes

   Tax planning means managing your investments and expenses in such a manner that your tax liability reduces. A reduced tax liability helps in increasing disposable income, and you can save more towards your goals.

   
   

7. Manage Your Debts

   If you have existing loans and debts, you need to manage them effectively to save on the interest cost. Pay off high-interest loans first and continue tax-saving loans like home loans.

   
   

8. Review Your Plan Regularly

   Review your financial plan at regular intervals so that you can find any deviation and correct it. Regular reviews also allow you to keep your financial plan on track to meet your financial goals.

   
   

9. When is the right time to make a financial plan?

   There is no right time to make a financial plan. The earlier you start, the better placed you are to manage your money efficiently and make the most of it. Ideally, you should start financial planning immediately after you start earning. However, if you have not started it, you can start immediately. It’s better to be late than never.

   Assess the different types of financial planning activities and choose those that you need. For instance, if you are just married, you might not need child education planning. Similarly, if you are nearing retirement, you might prioritise retirement planning or estate planning.

   So, start financial planning at the earliest and undertake all types of activities that suit your needs and requirements.

   
   

Elements of Financial Planning

There are some distinct elements of financial planning. Some of the common elements include the following –

1. Financial Goals

   Your financial goals are some of the important elements of your financial plan. The whole plan revolves around your goals since you aim to create the desired funds to fulfil them. So, in the financial planning process, you need to first identify and prioritise your financial goals and objectives so that you can create a plan based on their requirements.

   
   

2. Risk Appetite

   Another important element is your risk appetite. It measures your risk-taking ability and is important in shortlisting the investments needed for your financial portfolio.

   
   

3. Income And Expenses

   Your income and expenses determine the savings that you can put aside each month towards investment for your financial goals. That is why your income and expense statement or a budget is an important element when creating a financial plan.

   
   

4. Existing Assets And Liabilities

   Existing assets and liabilities include your existing savings and loans. The data of your existing assets and investments is important to know how much you have saved and find out the additional savings required. The liability figures show your existing debts so that you can figure out how to manage them. Moreover, the amount of debt also allows you to make a provision for its repayment in your monthly budget.

   
   

5. Portfolio Diversification

   Asset allocation and portfolio diversification are important elements of your financial plan as they help you pick out suitable investment avenues for creating funds. Asset allocation means investing your savings across different assets, while diversification aims to give you exposure to different asset classes.

   
   

Tips for Better Financial Planning

To create a financial plan and ensure that the plan helps you achieve your goals, here are some tips that you can follow –

1. Start Early

   Start the financial planning process as early in your life as possible. When you are young, you have time on your side. You can give your investments time and allow them to grow. Starting early gives you a long-term investment horizon over which compounding can work its magic and allow your corpus to grow.

   Moreover, when you have time, you can save small and affordable amounts regularly and still create the desired corpus for your financial goals.

   
   

2. Have A Disciplined Approach

   Discipline goes a long way in creating the corpus that you want for your financial goals. So, when you start investing, be disciplined. Invest regularly, without fail, to save affordably. Moreover, resist the temptation to dip into your savings, which are meant for your financial goals to indulge in a desire. If you want to make a big purchase, save for it first and then spend.

   
   

3. Cut Down On Unnecessary Expenses

   When budgeting, look for non-essentials and cut down on such expenses to save more. Higher savings would promote higher investments, and you would be able to create a decent fund for your goals.

   
   

4. Invest First, Spend Later

   Every month, as your income is credited to your account, invest a part of it first before you allocate it to the different expenses that you might have. This would ensure that your investments are disciplined. Moreover, the urge to indulge or overspend would be mitigated when your income is reduced.

   
   

5. Give Your Investments Time

   Don’t be in a hurry to watch your investments grow into a considerable fund. Remember, it takes time for a seed to grow into a gigantic tree. Give your investments some time to see the yields.

   
   

6. Keep a Regular Track Of Your Portfolio

   Keep a tab on how your financial portfolio is performing. Make changes if it doesn’t align with your risk appetite and investment horizon so that your plan stays relevant in changing conditions.

   
   

How To Know That Your Financial Plan Is Being Implemented As Planned?

Here are some questions you can ask yourself to know whether your plan is working for you-

• Does it benefit your current financial situation?
• Does it list out all your goals in measurable terms?
• Does it make you feel financially secure?
• Do you see yourself achieving your financial goals?
• Is it based on sound investment strategies?
• Are you getting enough returns as planned?

If you are finding it overwhelming to create and manage your financial plan, it is always recommended to seek the help of a financial expert. If professional help is sought, your financial planner may ensure that your financial plan also contains the following:

• List of possible risks and a management plan to combat them
• A mapping between the investments and goals, i.e., how each investment helps you achieve your goals
• Tax implications of each investment
• Risk reward ratio evaluation as per your risk appetite

Managing your money well may allow you to live the life you want with a possible sense of security. Investment planning may be a long-term commitment that requires a comfortable, mutually beneficial relationship with your planner until you meet your last goal. If you feel overwhelmed by the financial planning process, you can always consult a professional financial planner who can guide you through the process.

How Life Insurance Supports Financial Planning

Life insurance can help with financial planning too. Here’s how -

Risk protection through term plans

Term life insurance plans provide financial protection to you and your family. In your absence, these plans can help provide financial assistance to your family and help them face the financial loss they might suffer. As such, it is wise to consider term insurance for financial planning when you are planning to financially secure your family in your absence.

Wealth creation through ULIPs, Endowment

ULIPs and endowment plans are savings-oriented life insurance plans that help you create savings for your financial goals. ULIPs are market linked life insurance plans which combines life cover with the potential of wealth creation by investing in market linked funds, which may help in building a corpus over the long term , subject to market performance. Endowment plans on the other hand provide life cover and help create wealth through guaranteed* maturity benefit and bonuses (if declared).

Goal-based planning using long-term insurance plans

There are goal-oriented life insurance savings plans that help you plan for your long-term goals. For instance, child insurance plans help you create a secure corpus for your child’s future needs. Some plans come with the premium waiver benefit, which ensures that your child’s future needs are taken care of even in your absence. Then there are annuities, which help you save up for retirement. Such plans also create a regular source of income, in the form of annuity payouts, that help you live a financially comfortable life in your golden years.

Common financial planning mistakes to avoid

While planning your finances is important, you should steer clear of some common mistakes that you might make in the process. Given below are some of the common financial planning mistakes that might occur and ways to avoid them -

• Not identifying goals

  Making a financial plan without identifying your goals is like undertaking a journey without a destination in mind. Just like you might wander aimlessly in your journey, your financial plan would not be result-oriented, which might defeat its whole purpose.

  
  

• Not budgeting

  Budgeting is essential to identify where your income is being spent and to take measures to stop unnecessary spending. When you dont make a clear budget, you might end up spending more, and your savings get affected.

  
  

• Not assessing your risk appetite

  When investing, it is necessary to choose investment avenues that match your risk appetite. For this, you need to know your risk tolerance level. Investing in assets that do not match your risk appetite can cause financial panic when you do not earn the expected returns.

  
  

• Ignoring tax planning

  Planning your taxes can help reduce your tax liability and enhance your disposable income. If you ignore tax planning or don’t use effective tips for tax-saving plans, there’s a chance you are overpaying on your income tax and have a limited disposable income to save.

  
  

Difference Between Financial Planning and Wealth Management

The words wealth management and financial planning are two different concepts, although many individuals use them interchangeably. Let’s understand how these two are different from one another -

Tools & Calculators for Financial Planning

There are various online tools and calculators that you can use to make financial planning an easy activity. Some of the most useful tools and calculators are as follows -

Budget Planner

The budget planner tool is quite useful for budgeting. It can help categorise your expenses so that you can know where your income is being spent. The planner also gives you the disposable income after you enter the total income and expenses.

Term Insurance Calculator

The term insurance calculator helps you estimate the sum assured required. You can use the calculator to find the right coverage needs based on your income, expenses, age, existing assets and liabilities, etc. This makes buying the right term plan easy.

Retirement Calculator

If you want to know how much retirement corpus you would need, this calculator can come in handy. You can estimate the required retirement corpus along with the savings needed to achieve the corpus so that you can plan for retirement efficiently.

ULIP Calculator

If you want to create a market-linked corpus for your goals, the ULIP calculator can help you assess the returns you can earn over a specified time period at assumed rates. You can also use the calculator to plan your savings so that you can create the desired corpus with the right ULIP plans.

Key Reasons: Why Start Financial Planning Early

As stated earlier, it is better to start financial planning as early as possible. The reasons for the same are as follows -

• When you start financial planning early, you have time on your side. You can choose long-term investment plans and create a suitable corpus for your goals through compounding returns.
• When you start early, you can learn about the financial markets and avoid common investment-related mistakes. You can also know where to invest money depending on your financial goals.
• Knowing your income and expenses can help you manage your spending habits and make better financial decisions.
• Starting your financial planning early on can make you responsible with your finances and develop good habits over time.
   

Key takeaways

• Financial planning is an activity wherein you assess your financial health - from income and expenses to existing investments and debts.
• It is important to plan your finances so that you can budget your expenses, save and create a corpus for your financial goals.
• There are different types of financial planning activities, like tax planning, retirement planning, emergency planning, child education planning, etc.
• There is a detailed financial planning process, and it is recommended that you follow the steps one by one to create a comprehensive financial plan.
• When making a financial plan, avoid common mistakes like not recognising your goals, risk appetite, ignoring taxation, or avoiding budgeting.
• Life insurance plans can also help with financial planning, given their benefits and goal-oriented nature.
   

Conclusion

Financial planning is an important activity to manage your income and expenses and create funds for your financial goals. Understand what it is all about and plan your finances effectively. Identify your goals and then save according to your risk appetite and investment strategy so that you have sufficient funds to fulfil your goals. Review your financial plan regularly for any changes and pave the way to financial independence.

FAQs

1. What are the 5 steps of financial planning?

   The 5 important steps of financial planning are as follows –

   • Goal identification and prioritisation,
   • Budgeting and assessment of disposable income,
   • Risk profiling,
   • Asset allocation and portfolio diversification
   • Regular review.
      

2. What is the most important step of financial planning?

   All the steps of financial planning are important. However, one essential step is goal identification and prioritising, which helps you know the reasons for creating the financial plan in the first place. Moreover, identifying your goals helps you to know the –

   • How much do you need to save?
   • For how long do you need to save?
   • Which investment avenues to pick?