What is Financial Planning

What is financial planning?
A: Financial Planning is all about preparing a sequence of action steps to achieve a specific financial goal. A financial
plan is a roadmap to achieve your life's financial goals. It is like a map, where you can always see how much you have
progressed towards your projected financial goal and how far you are from your destination.



Financial planning may mean different things to different people. For one person, it may mean planning investments to
provide security during retirement. For another, it may mean planning savings and investments to provide money for a
dependent's college education. Financial planning may even mean making career-related decisions or choosing the
right insurance products. In reality Financial Planning is the process of meeting financial goals through the proper
management of finances.

It is generally seen that people have a misconception that financial planning is about saving more and spending less but
that is not the case, it is more about saving the right amount so that future goals can be met. The objective of financial
planning is to ensure that the right amount of money is available in right hands at right point of time in the future to
achieve the desired goals and objectives. It provides direction and meaning to your financial decisions. It allows you to
understand how each financial decision you make affects other areas of your finances. Financial planning and
investments can be undertaken by anyone with a clear assessment of one's inflow of funds and the goals that need to
be achieved from time to time.

Financial planning is a process consisting of the following activities-

Assessing present assets and resources to understand the current situation

Setting objectives- Both in terms of returns and risks

Determining constraints and financial planning areas like Taxes, Legalities, time horizon, liquidity, unique
circumstances

Determining appropriate plan and strategy to achieve financial goals.

Evaluating the plan in a timely manner.

Adjusting and modifying the plan if change in conditions.

Financial planning is important because it guides and controls the financial decision making process. While making a
financial plan objectives and constraints of individual are included so it represents the long term objective of the
individual. Planning is a dynamic process so if there is are any changes in an individual's circumstances they can be
incorporated into the financial plan.

What are the broad areas in which financial planning can be undertaken?
A: Financial planning consists of a variety of things. All these ought to be planned by individuals keeping in mind their
stage in life cycle and their needs

Financial planning is achieving your financial goals in the most efficient manner. The broad areas of financial
planning include -



1. Investment planning -Your wealth will only grow over time if you have invested it in assets. Investment
planning deals with the kind of investments an individual should invest in to get the best out of his wealth. In this the
risk and return profiling of an individual is done based on his life stage, spending requirements with respect to his
income and wealth, time horizon and liquidity requirements and various individual specific constraints. Investment
Planning is important because it helps you to derive the maximum benefit from your investments.

2. Cash flow planning - In simple terms, cash flow refers to the inflow and outflow of money. It is a record of your
income and expenses. Though this sounds simple, very few people actually take time out to find out what comes in
and what goes out of their hands each month. Cash flow planning refers to the process of identifying the major
expenditures in future (both short-term and long-term) and making planned investments so that the required amount
is accumulated within the required time frame. Cash flow planning is the first thing that should be done prior to
starting an investment exercise, because only then will you be in a position to know how your finances look like, and
what is it that you can invest without causing a strain on yourself. It will also enable you to understand if a particular
investment matches with your flow requirement

3. Retirement planning - Retirement planning means making sure you will have enough money to live on after
retiring from work. Retirement should be the best period of your life, when you can literally sit back and relax or
enjoy your life by reaping benefits of what you earn in so many years of hard work. But it is easier said than done.
To achieve a hassle-free retired life, you need to make prudent investment decisions during your working life, thus
putting your hard-earned money to work for you in future. Planning for retirement is as important as planning your
career and marriage. Life takes its own course and from the poorest to the wealthiest, no one gets spared. We get
older every day, without realizing. However, we assume that old age is never going to touch us.

The future depends to a great extent on the choices you make today. Right decisions with the help of proper
financial planning, taken at the right time will assure smile and success at the time of retirement. Retirement
Planning acquires added importance because of the fact that though longevity has increased, the number of
working years haven't.

4. Tax planning - Tax evasion is illegal but tax minimization is legal. Thus you can reduce your tax liability by planning
effectively. With proper tax planning you can increase your after tax income.

5. Children future planning- It is essential to plan for the future of your children. The purpose of Children's Future
Planning is to create a corpus for foreseeable expenditures such as those on higher education and wedding and to
provide for an adequate security cover during their growing years. Savings alone is no longer enough. For ensuring
adequate funding of your child's education, you as a parent need to invest appropriate amount systematically and at
regular intervals to provide for a financial security to cover any casualties.

6. Insurance planning -Insurance Planning is concerned with ensuring adequate coverage against insurable risks.
Calculating the right level of risk cover require considerable expertise. Proper Insurance Planning can help you look
at the possibility of getting a wider coverage for the same amount of premium or the same level of coverage for the
same amount of premium or the same level of coverage for a reduced premium. Insurance, simply put, is the cover
for the risks that we run during our lives. Insurance enables you to live your lives to the fullest, without worrying
about the financial impact of events that could hamper it. In other words, insurance protects you from the
contingencies. So insurance planning is very important.

7. Estate planning- Every individual acquires a considerable amount of estate during his lifetime which after his death
or during his lifetime is transferred to either his heirs or to institutions or to charities. Planning this transfer in the
most efficient way is termed as Estate planning.


Who requires financial planning?
A: Almost everyone requires financial planning. As the old adage goes-If one is failing to plan, they are surely planning
to fail. Good and thoughtful investment planning is the cornerstone of an individual's good financial health.

Financial planning is about managing your finances to achieve your financial goals in the most optimum manner. It's not
about making huge savings or less spending nor does it mean having lots of money for huge making investments. It is
about prioritizing your financial goals and achieving them in the most efficient manner to derive maximum utility out of
your decisions. So, we can say that everybody requires financial planning as everybody have financial goals and
everybody wants to achieve them in the most efficient manner.

Life requires self-generated, goal oriented action - a plan. This extends to every area of your life, including financial. The
degree of your planning will determine at least in part the degree to which you are successful. And, although a financial
plan does not guarantee success, it is necessary for it (at least in the long-term).

You don't have to be mega rich to have a financial plan. Neither do you have to be very old and approaching retirement.
It does not matter how much you earn or what your age is. In fact, your financial situation influences almost every
aspect of your lives.from the type of house you live in; to the type of car you drive, to how many vacations you can take.
Regular financial planning can help give you peace of mind.

All too often, people delay planning for the future. They may feel such planning should take a back seat to staying
financially afloat in the present. However, even those living from paycheck to paycheck can benefit from financi al
planning by creating a budget. A budget can be used to determine what is actually spent each month and find ways to
trim or even eliminate unnecessary or out-of-control expenditures.

The right time to create a financial plan is right now. No matter what your income level or what your hopes for the future,
you need a solid plan to achieve your goals. Drifting through life without carefully set goals and well -researched
methods of achieving them is a recipe for disaster. To enable your money to offer you more of what you want out of life,
start creating a financial plan today.


How it is different from wealth management?
A: Although similar fundamentally, Financial planning defers as compared with wealth management.

Wealth management though similar to financial planning is dissimilar in the sense that To do wealth management a
considerable amount of wealth is required. Financial planning on the other hand is required by everybody as it deals
with planning related to achieve financial goals in the most effective manner.

Any individual go through three Phases in his life -



The Education Phase- In this phase individual's gain knowledge and education but there is no financial wealth at this
time so no wealth management is required but even at this time individual have to do financial planning to achieve the
utmost of their financial decisions. Financial planning includes decisions regarding how much to save to go to certain
college, how much loan can be taken for college fees, how it will be paid etc.

The Accumulation phase- In this phase individuals start working and start accumulating financial wealth and wealth
management is required at later stages when wealth is accumulated. Financial planning is required at this stage with
decisions relating to how to accumulate financial wealth, how much to spend now and how much to accumulate for
future spending etc.

The Retirement phase- In this phase if individuals have accumulated wealth then wealth management is required but if
they do not have large financial wealth then it is not required on the other hand financial planning is still required with
decisions relating to investment planning (where to invest money) and estate planning ( how to transfer estate).

Thus we can say that Wealth management is required only by the affluent clients but financial planning is required by all
at all stages of life and we can also say that in broader term wealth management is also a part of financial planning.


Why should you make a financial plan?
A: There are many advantages of financial planning which can have far reaching positive effects on one's life. Discover
why planning is important for you.

Dedicated financial planning is the key to success and it provides a direction to your financial decisions. The whole
process makes it easier to make smart and profitable financial decisions and derive utmost utility from it.

Financial planning is the most crucial decision of one's life. If you start planning early, you can get out of whole a lot of
financial mess arising later in life. It is very common to spend more than what you earn. Many facilities like credit cards,
buy now pay later schemes, installment facilities and so on, compels you to overlook finances. At the end of the month,
when bills keep pouring in your mail boxes, you find yourselves in a sticky situation. And this mounting bill payment
adds a semi-colon to your long term dream of owning your own house. Sometimes, medical emergencies also forces to
dig into your children's education fund. Marriage plans of your only daughter? Let's borrow some money from the
retirement fund. There goes the trip to Egypt; you have been planning all those years!

The answer to all the above mortifying financial situations is 'Financial planning'. Financial planning helps give a
direction to your financial decisions. It helps you decide various investments that can bail you out of your financial
problems. For example, investment in various funds may help you repay the loan or save enough for your retirement.
Once your financial goals are set, it helps make your life more secure and flexible for any financial emergency situation
that may arise.

It is wise to seek expert advice from professionals such as a financial planning expert because in the attempt to save on
the fees, you could end up with poor financial information and decisions that can prove disastrous for family funds. In
the case of the working individual, insufficient or random saving for retirement can lead to a reduced lifestyle later, while
in the case of the businessman, poorly managed tax preparation could culminate in unexpected tax debt and a loss of
carefully accumulated wealth.


Who requires financial planning?
A: Depending upon an individual's needs and wants, a financial plan should include various components. Some things
might have precedence over the others, however all things affecting the goals should be covered.

A financial plan should include everything which helps in attainment of your financial goals in the most efficient manner.
Though it differs from individual to individual as something important for one individual may not be important for others.
But broadly we can say that it should include everything that affects his financial goals.

Financial planning in a broad way should consist of the following activities-



Assessing present assets and resources to understand the current situation financial situation - It is the most
important thing to do while doing financial planning as this is the starting point utmost care should care should taken
while assessing the present situation.

Setting objectives or goals- Both in terms of returns and risks and long term and short term goals - On the basis of
current situation and desired future conditions goals are designed. It should be noted that goals should be realistic and
proper prioritization of goals should be done.

Determining constraints in financial planning areas like Taxes, Legalities, time horizon, liquidity, unique
circumstances - While doing planning apart from goals an individual can have constraints like not to invest in non-
ethical companies, liquidity constraints etc. so these constraints should be taken into account before designing a plan.

Determining appropriate plan and strategy to achieve financial goals - After analyzing the goals and constraints
various alternative plans are designed and the best plan which achieves the goals in the most efficient manner is
chosen.

Evaluating the plan in a timely manner - It should be noted that financial planning is a dynamic process and not a
static one as individual circumstances keeps on changing thus it should be evaluated on timely basis.

Adjusting and modifying the plan if change in conditions - After evaluating the plan if it required that changes in
plan should take place than modifications to plan should be done.


What is Goal setting?
A: It is one of the foremost and the most important step towards planning finances and investments. Getting this step
correct sets a strong foundation for other activities.

The first and foremost step before starting anything is goal setting or objective setting. The main purpose of goal setting
is that it provides direction and purpose to you financial planning. It is important to understand what your goals are and
over what time period you want to achieve your goals.

Some goals are short term goals those that you want to achieve within a year while others are long term goals which
are for a period of more than one year. Depending on your life stage, expenditure, income, future goals in terms of
children education, lifestyle and holidays you can set your goals. Any individual can have many goals but there is
always a trade off between goals like you can choose between buying a house and providing children's education fees.
So while setting goals it is very important to prioritize goals because as explained above there is always a trade off
between goals and it is dependent on you for what goal you want to provide first. While goal setting it is important to
analyze how important the goals are and what the individual will do if goals are not met. An individual goals can be
goals relating to buying home, holidays, children education, retirement planning, social goals, goals relating to estate
planning etc.

For example:
Mr. Ram a middle class individual with average salary can have the following goals -




Why Goal Prioritization is important?
A: How does one decide which goal is more important than the other? Efficient prioritization is the key to good planning.

Setting of goals is important but prioritizing goals is even more important. An individual can have many goals but is
important to streamline and prioritize those goals.

For Example:
Mr. Ram who is an average middle class individual has the following goals in his mind



Mr. Ram has not done proper financial planning and has not prioritized his goals. He has provided for his goals in a
random manner. But after buying a new car, a new house, having a holiday abroad and providing for children education
and parents medication he do not have enough money left to provide for retirement planning and he is regretting the
fact that he took lavish holiday abroad and bought a new car. If he had done proper prioritization of goals and had
provided for retirement before taking a holiday abroad he would not have been in a situation of regret and his
prioritization would have been in the following manner-



So even if Mr. Ram didn't had money after providing for the first four or five goals he would have not regretted because
he had made segregation between essential goals and desired goals and meeting essential goals is more important
than desired goals.

If you don't prioritize goals then it will be very difficult for you to take the most efficient financial decisions and derive
utmost utility from them. Many a times it is seen that investors misspent their income and are in real trouble when it
comes to spending on more important goals. Thus prioritization of goals is a very important task. Prioritization is the
essential skill you need to have to use the very best use of your own efforts and money. It is particularly important when
wealth and income is limited but goals are seemingly unlimited. It helps you to spend your hard earned money wisely,
freeing you from less important tasks that can be attended to later or quietly dropped.


Assessing the current situation.
A: Introspection of one's current situation is the starting point to bridge the gap between present and future.

Before starting any type of financial planning it is important to understand and analyze what is your current situation or
where do you stand right now. This helps in understanding what will be your goals with respect to how much wealth you
have and how much to accumulate, what insurance you have and how much more less you should have. Financial
planning acts as a bridge between your current situation and your future desired situation. To make the best use of this
bridge called financial planning it is essential that both its shores- one your current situation and the second your
desired future situation should be properly made. The whole process of financial planning is based on what your goals
in future are and assessing the current situation properly helps in defining future goals in the most optimum manner.
Thus it is an essential part of financial planning.

Mr. Ram is an average middle class person with an average or modest salary which is just a little bit more than his
expenses. Mr. Ram has done financial planning by planning what will be his goals in future but has not assessed his
present situation correctly. Mr. Ram is in earlier fifties but due to his goals requiring large sum of money most of his
investments are in risky equities for higher returns. But his current situation that is high age, not very large income does
not allow him to take that risk and most of his investments should be in fixed income securities. Due to his not assessing
the current situation correctly in spite of doing financial planning he may not be able to achieve his goals effectively.



If Mr. Ram would have assessed his present situation in the way as shown above he would have analyzed his risk
properly and would have reaped better results out of financial planning.