FINANCIAL PLANNING - CONCEPT


What is financial planning?

Financial planning is a step-by-step process for achieving one's life objectives. A financial plan serves as a guide as you travel through life. It is the process of developing financial policies for an enterprise's purchase, investment, and management of finances. It essentially assists you in gaining control of your income, spending, and assets, allowing you to manage your money and reach your goals. If you look closely at the instances above, you'll see that there is one aspect that unites them all: money. To achieve your objectives and aspirations, you must have enough money. More essential, you must have money at the correct time. For example, if you wish to save Rs. 10 lakhs for your daughter's college education, you must raise this money by the time she reaches the age of 18. Not even a year later. This is when financial planning comes in handy.





Objectives of Financial Planning

There are several goals to look forward to in financial planning:

a. Capital requirements- This will be determined by criteria such as the cost of current and fixed assets, promotional costs, and long-term planning. Capital requirements must be considered from both short- and long-term perspectives.

b. Capital structure determination- The capital structure is the composition of capital, i.e., the relative sort and proportion of capital required in the firm. This encompasses both short-term and long-term debt-equity ratio considerations.

c. Developing financial policies for cash management, lending, borrowing, and so on.

d. A finance manager ensures that finite financial resources are used as efficiently as feasible and at the lowest possible cost to maximise returns on investment.

What are Benefits of financial planning?

Financial planning has a plethora of practical advantages. It enables you to: 1. Raise your savings rate

Saving money without a financial plan may be achievable. However, it may not be the most efficient method. You gain a lot of insight into your income and spending when you build a financial plan. You can keep track of your expenses and intentionally reduce them. This instantly enhances your long-term savings.

2. Experience a higher level of living.

Most individuals believe that to make their monthly bills and EMI repayments, they must reduce their way of living. On the contrary, if you have a strong financial strategy, you will not have to sacrifice your lifestyle. It is possible to attain your objectives while living comfortably.

3. Be ready for emergencies.

Putting together an emergency fund is an important part of financial planning. In this case, you must guarantee that you have a fund equal to at least 6 months of your monthly wage. This way, you won't have to worry about finding money in the event of a family emergency or job loss. The emergency fund might assist you in meeting a variety of costs on time.

4. Obtain mental tranquillity

You can pay your monthly costs, save for your future objectives, and spend a bit for yourself and your family without fear if you have enough money. Financial planning allows you to handle your money more effectively while also enjoying peace of mind.

Financial planning for life goals

Personal financial planning is extremely important in India. It is not just a matter of raising your savings and decreasing your spending. Financial planning entails much more than that. This involves attaining your long-term objectives, such as:

1. Generating wealth

Because the cost of common products is rising, if you want to preserve or improve your existing level of life in the future, you must accumulate a significant corpus of wealth. In the future, you may wish to buy a better automobile or a new house. All of this necessitates money, and it just emphasises the need of wealth building. It is feasible to reach these objectives by properly investing your money in the appropriate channels. Equity mutual funds might be a good long-term investment alternative. In the long run, these funds may assist the investor in accumulating wealth.

2. Retirement preparation

Your retirement might be 25 or 30 years away. However, this does not imply that you should plan for it when you retire. To live a happy and comfortable retirement life, you must begin constructing your safety net right away. Planning ahead of time might help protect your future from financial uncertainty. Also, if you start early, you can benefit from the force of compounding, which can help you develop a large enough corpus over a 25-30 year period.

3. Education of a child

Education has grown prohibitively costly, not only in India but around the world. And this expense will only climb in the future. As a result, you must begin planning as soon as your child is born. Calculate how much you want to make and begin investing in long-term investment avenues that will assist you in achieving this objective. If you are unsure how to continue, you might seek the guidance of a financial expert.

4.Tax savings

You most likely pay a significant amount of tax each year. However, you can now lawfully reduce your tax bill. The Indian Income Tax Act has a number of measures that allow persons to lower their tax liability. You can determine the best ways to invest your money and lower your taxable income by preparing your taxes ahead of time. Mutual funds are a tax-efficient way to invest for your long-term goals.


Financial Planning Process

When developing financial planning strategies and offering suggestions, financial planning experts adopt a collaborative and iterative approach that considers all elements of a client's financial condition.


The financial planning process includes the following methods:

Establish and define the relationship with the client.

The financial planning professional tells the customer on the financial planning process, the services the financial planning professional provides, and the financial planning professional's abilities and expertise. The financial planning professional and the client decide if the financial planning professional's services and capabilities suit the client's needs. The financial planning professional analyses his or her abilities, expertise, and experience in providing the services requested or anticipated to be required by the client. The financial planning expert determines and reports any conflicts of interest. The services to be offered are agreed upon both the financial planning expert and the customer. Before any financial planning is provided, the financial planning professional describes the scope of the engagement in writing, including details about: the responsibilities of each party (including third parties); the terms of the engagement; and the financial planning professional's compensation and conflict(s) of interest. The scope of the engagement is written down in a formal contract signed by both parties or formally acknowledged by the client, and it contains a method for ending the collaboration.

Collect the client’s information.

Before making and/or executing any suggestions, the financial planning expert and the client define the client's personal and financial objectives, requirements, and priorities that are important to the scope of the engagement. Before making and/or executing any suggestions, the financial planning expert gathers adequate quantitative and qualitative information and documentation about the client relevant to the scope of the engagement.

Analyze and assess the client’s financial status.

The financial planning expert examines the client's information, pursuant to the scope of the engagement, to acquire a knowledge of the client's financial status. The financial planning specialist evaluates the client's present financial condition and compares it to the client's goals, requirements, and priorities.

Develop the financial planning recommendations and present them to the client. The financial planning professional considers one or more strategies relevant to the client's current situation that could reasonably meet the client's confirmed objectives, needs, and priorities; develops financial planning recommendations based on the selected strategies to reasonably meet the client's confirmed objectives, needs, and priorities; and presents the financial planning recommendations and supporting rationale in a way that allows the client to make an informed decision.

Implement the financial planning recommendations.

The client and the financial planning professional agree on implementation responsibilities that are consistent with the scope of the engagement, the client's acceptance of the financial planning recommendations, and the financial planning professional's ability to implement the financial planning recommendations. The financial planning expert selects and delivers relevant product(s) and service(s) that are compatible with the financial planning recommendations agreed by the client based on the scope of the engagement.

Review the client’s situation.

The financial planning expert and the client jointly identify and agree on conditions for assessing and re-evaluating the client's position, which may include goals, risk profile, lifestyle, and other pertinent changes. If a review is conducted, the financial planning professional and the client examine the client's situation to assess progress toward achieving the objectives of the financial planning recommendations, determine if the recommendations are still appropriate, and confirm any revisions mutually agreed upon.

Financial planning for Beginners – Top 10 Golden rules

It is difficult to instil the habit of financial planning in young individuals. However, when they volunteer to arrange their money, they have no idea where or how to begin. Here are ten golden principles to follow in order to properly arrange one's money.

Manage your Money

Managing one's finances does not have to be tedious. It's not rocket science, and you don't have to come from a financial background to do it. You simply need to be a little bit

committed. Making the decision to conserve money is the first step toward financial management. Saving money may be a significant step toward financial freedom. Consider borrowing from a buddy for that last-minute doctor's appointment! If you don't have any pals, you may be forced to use your credit card. And you already know that credit card debt is the costliest type of debt. Repeat this a couple more times, and you'll find yourself in a financial trap before you realise it. You may have several financial objectives in mind. Such is purchasing a car, the latest smartphone, or accumulating riches. You need money in all of these circumstances. But from where will it come? You must have savings!

Saving money keeps you from getting into debt. Not only that, but systematic saving on a consistent basis may make you wealthy. You may be able to meet your financial objectives on time. You may be asking how to save money at this point. And maybe more importantly, how much money should be saved? As soon as you get your paycheck, start categorising it. These categories include costs, EMIs, investments, and savings. Make it a habit to save at least 10% of your monthly income. It really can be that simple! However, do not deposit it in a piggy bank. Money sitting in a piggy bank does not grow. Even a savings account may not yield greater yields. Instead, you may put this money into a liquid fund. A liquid fund is a form of debt mutual fund that invests money in fixed income generating instruments such as FDs, commercial paper, certificates of deposit, and so on at a rate of roughly 4%. Invest your savings every month over a lengthy period and discover what it can achieve for you!

Regulate your expenses wisely

If you're living paycheck to paycheck and finding yourself short on cash even before the end of the month, you're probably living much beyond your means. Perhaps there are a lot of unanticipated bills! These may leave you with insufficient funds to meet your basic needs. But there is an escape route. Try making a budget. You won't be able to govern your financial flows until you establish a budget. A budget simply indicates how much money is coming in and how that money is spent.

Begin by classifying your spending as fixed and variable; urgent and non-urgent; essentials and luxury; avoidable and unavoidable. In this manner, you will have a complete inventory of spending in front of you. The more you turn things from abstract to concrete, the easier it is to grasp them. You may make a list of needs and prioritise which ones to handle first. It all comes down to prioritisation. You must understand that you have limited resources and boundless desires. However, you must manage your resources. The sooner you understand this reality, the better you will be able to resist your inclinations toward unnecessary spending.

After you've covered all of your basic bills, you may set aside some funds for amusement and pleasure. You may minimise overpaying by making a grocery list before going to the department shop. You may also designate a weekday as a no-spend day. Make a firm commitment to your budget. Consider it a commitment rather than a burden, and keep to the rules.

Maintain a personal balance sheet

A personal balance sheet may help you keep track of what you own and what you owe! It's a really effective instrument for taking your money to the next level. It is a declaration in which you can list your assets and obligations. Your personal net worth is determined by the

difference between your assets and liabilities. Gather your bank statements and other proofs of liabilities before you begin. Then, make a list of your assets, such as your bank balance, investments, house worth, and the value of other assets. To determine the entire worth of your assets, add up all of your assets. List your liabilities as well, such as your vehicle loan, house loan, credit card bills, and residual amounts on previous loans. The total of your obligations will reveal the amount of money you owe. Ideally, your net worth should be positive, which implies that the money you possess exceeds the money you owe. Don't give up if the news is bad. Your net worth will progressively improve as you continue to repay your loans.

Another key aspect of asset management is determining what kind of assets you need to