What is Financial Planning? Financial planning is a process of evaluation based on current cash flows and assets to predict where an individual or organization will afford to achieve its future goals. We, humans, make a lot of mistakes when it comes to money. How do we stop making mistakes? How do we use efficiently the hard earned money we make? The only solution to it is to make a proper financial plan. By following the action plans, you will certainly achieve your predetermined goals.
Having a good plan helps one to stick on to their goals, be it short term or long term. It helps you to save as much as you can by controlling your spending habits. If we do not have a proper plan, we might end up borrowing to achieve some of our goals and then waste our savings on paying interest or end up with no savings after years. Sometimes even that does not work and we will end up not achieving success. Financial planning helps you in budgeting by understanding your current position and knowing where you want to reach. Now there are financial advisors available to help organizations and individuals to get a proper plan done. Be sure to approach a really good financial advisor who is not trying to sell anything but being a good advisor to you.
Importance of Financial Planning Financial Planning is related to one's financial goals. It describes one's spending, investing and financing plans. It helps in financial forecasting and budgeting. Above all financial plans helps you to achieve your goals efficiently. Firstly, let us look into the steps involved in a planning process.
Steps in planning:
1. Determining Objectives o Setting Goals
2. Considering Planning Premises
3. Identifying Alternatives
4. Comparing Alternatives
5. Choosing the best course of action
6. Formulating supporting plans
7. Establishing sequence of activities
Now, let us look into the various advantages of financial planning and learn how we are going to benefit from it.
1. Helps to set Goals:
Financial plans help one to set both short-term and long-term goals. Not only setting goals but the plan directs you to achieve your goals. Goals can be anything from buying a car, house, higher education of kids, kids marriage, retirement plans, funds for old parents etc. Goals can also be categorized as achievable, priority etc. Some people have the habit of facing issues as an when it comes but that is not the right way of dealing things. You need to be prepared in advance so that you can lead a tension free life and also things will work out better. Once you have planned your goals and made a computation on your inflows and net worth, you will have a clear picture of how much more you need to achieve that goal. Accordingly, you can plan and create the necessary fund. It will make your journey towards achieving the goal easy.
2. Helps in Financial Decisions:
As you already have planned for the future, you will have a clear idea of your financial resources and the expenses that are likely to arise in the future. Keeping these things in mind you will be able to take an appropriate financial decision as per the situations. In short, you will be able to take sensible decisions. We might have to take financial decisions in our life almost every day. Once you have your goals and you know the action plans, you will be aware of the cash that you can utilize. Hence your financial decisions can be taken much easily. At times, delay in taking financial decisions can lead you to miss on something, maybe a good opportunity. By having a proper plan you can avoid such things and be prepared for unseen needs as well. When you know where you stand in terms of money, taking decisions becomes much easier. We have a budget, hence we know we have to stay within our limits. This helps us not to base our spending decisions on an emotional basis.
3. Manages cash inflows and outflows:
Financial Planning helps to map and manage your current and future cash flows. Cash flows include both cash inflows and cash outflows. Only once you get a clear picture of your inflows and outflows along with your needs and goals, you will be able to do anything, that is either to control or increase the inflows. At times, due to certain necessity, the cash inflow should be more and if your monthly inflows do not help you to meet the issue, you can consider other options like taking a loan or so. Thus you can manage and arrange cash wisely with the help of a financial plan. Having a clear picture of your financial status helps you to consider alternate options. After financial planning, you will have a clear picture of how to arrange cash to meet your goals efficiently, you just have to flow the action plans to reach your goal. As you know your goals and the monetary distance to reach there, you will have a good control on your expenses and luxuries as well.
4. Savings & Investments:
Savings and investments are very much required for a person as we might not be this healthy in the future or we might not get this income later in life. Each one of us should be prepared for our future. Plans help us to forecast the future expenses and contingencies and accordingly guide us to meet those. Only if we save today, it will be useful for us tomorrow. Financial planning can help us understand whether we have sufficient savings and investments to meet our goals in life. It also helps us to diversify our investments, this lessens the risk if any associated with a particular investment. During retirement, our income dries up and will have to depend on our savings and investments. Proper financial planning helps us to fight inflation even during our retirement life. It also helps to check the adequacy of our insurance and helps one to pay off their debt smoothly. Some people do not buy insurance thinking they are in good health and some may invest too much thinking it is a savings plan. Both these are not advisable at all.
5. To meet Contingencies:
Not all expenses and cash requirements can be foreseen and forecasted. There are some situations which are beyond our control but while making a plan, we need to consider these factors as well. A provision should be kept aside for contingencies and unforeseen things as well. Only then we will be able to meet those efficiently when such an incident arises. Having a proper financial plan helps you to mitigate unexpected expenses which include medical expenses as well. We never know when we will fall sick and how much will it cost us to get a good treatment. Calculating this expense in advance won't be practically possible. But a financial plan advises you to be prepared for such a situation if in case it arises. By following the action plan, you will have some money kept aside to meet such contingencies and unforeseen circumstances.
Conclusion It is always advisable to have a financial plan so that managing and spending cash becomes easier. One should always know their net worth and what more is required to achieve their goals in advance to be prepared themselves. Financial plans definitely help in this. If you feel, you are not good at planning, get the help of an advisor. They will be able to correct us by pointing out our mistakes. They can also help us by advising on the right source of investment and savings too. It is never too late, start planning now to lead a better life ahead.
I would like to express my views by taking example of business organisation.
Finance is the life blood of an organisation and planning means to forecast about the future. In an organisation there are now a days a new unit is being set up which is known as strategic business units (SBUs) which helps the organisations in formulating , implementing and evaluation of plans which are essential for the working and development of the organisation. each SBUs maintain there own rules and regulations and they work as a separate entity inside the organisation and it helps to know the proper flows that is inflows and outflows of finance in the organisation.
Financial planning in case of individuals are also the same that is one should have a proper plan about their income and spending's.
An excellent article from the author on financial planning. Indeed financial planning is the most essential component for saving, investment, wealth creation and retirement planning. Financial planning has various components like budgeting, goals, understanding short-term and long-term goals, chosing ideal financial instruments for each short-term goal and long-term goal, projection of inflation, insurance planning, etc. Without financial planning, a person can't have a secured future irrespective of his/her income.
Another important thing in respect of financial planning is evaluation of investment instruments. Tthe investor must regularly evaluate his/her instruments at least once in every year and make necessary course correction if any instrument is not functioning properly.
A timely article that aptly suits the salaried or the working class who often have to stretch their pay packets to meet the month's needs. But we also have to save for our children, our later years (when we are dependent on others) and emergencies.
Having a realistic plan about our finances goes a long way to ensure that at least we have our life goals in sight and it (own house, children's higher education & weddings) doesn't always remain a dream.
I would also like to add that financial planning for the family should involve both husband and wife so that there is a better understanding and a grasp of the real picture. One should be religiously disciplined while handling hard earned (legal) money as it's very easy to get carried away with shopping trips, family holidays and lavish lifestyles.
Many people make the mistake of counting the chicken before the eggs hatch. Even before the money is in hand, they start spending and find that they fall short at the end. The family as a whole should incorporate the habit of saving and then spending and not the other way around.
Many financial experts opine that an integral part of financial planning is to have a good term insurance policy and a viable health insurance plan for the family, especially for the salaried class.
Last but not the least, we should take time to periodically review the financial plan to assess that are we still on track - have we made an unrealistic plan, should we modify?