Financial Planning

“No one has ever become rich simply by saving. Money grows by proper planning!”
-Warren Buffet (Business Magnate, Investor, Philanthropist)

“I need to start saving for the future, but I have commitments to be met today and liabilities to be paid off tomorrow. How do I start, where do I start?” How many of you have stumbled upon this statement throughout your life and have reached close to nowhere with respect to accomplishing your financial goals?

Worry not, you haven’t failed to achieve your goal, you just haven’t succeeded to appropriately plan in order to achieve your goal. Financial Planning is the process of creating wealth by organizing your incomes and expenditures and foreseeing your financial health in advance and preparing yourself for contingencies. The need for Financial planning has increasingly amplified over the years, making it imperative to have a successful financial future.

The common tendency is to make ends meet, i.e. you have to pay for rent, transport, groceries etc. for the month or need to build a house in a year, and if you earn near as much or get a loan - you’re financially planned. This is often the misconceived idea of being financially planned. Financial Planning is a persistent process that requires discipline and precision over a long period of time. Here is a simple, yet eye-opening distinction between having a Financial Plan and not:

A Strong Financial Plans Helps You Absence of Financial Planning Leads You
To manage your cash flow effectively To be unaware of cash flows
To foresee, set, reduce and monitor expenses To create ad-hoc plans that fail or create no successful outcome
To address debt payments efficiently To get tied down in debt payments and end up with more credit than you began with
To comply with all legal compliances To be subject to legal impediments abruptly, without having an option to reduce the difficulties caused
To invest with proper risk management To have no investment avenues as you have no savings in the first hand

Financial Planning isn’t just budgeting; it is a much bigger picture than we’d generally anticipate. To a great extent, every one carries it out in one way or the other in the form of planning how our income gets divided for the month or how to make debt payments and the like. Generally, one makes Financial Plans only when one has the need to, however to foresee the needs in advance and to plan today for tomorrow is the true essence of Financial Planning.

Personal Financial Planning, as compared with Business Financial Planning, is less complex. Nevertheless, it still takes great effort and discipline in creating an ideal financial plan for oneself. Before getting into how to make a Financial Plan, it is important to identify what elements need to be covered in it. It must essentially include the following:

  • Income/s: Identifying, tracking and monitoring all income sources and projecting an estimated increase or decrease.
  • Savings/Investments: Recognizing avenues and creating future commitments leading towards wealth creation.
  • Expenses: Anticipating the expected expenses and mandating timely payments; Understanding and reducing unnecessary expenses where and when required.
  • Debt management: Knowing the level of risk one can take and managing debt ratio
  • Retirement Plan: Preparing yourself for a relaxed retirement.
  • Taxes: Ensuring legal compliances with regard to taxes
  • Insurance: Keeping you safe and managing day-to-day risk from unexpected forthcomings.

A financial plan must appropriately cover the above elements clearly in order to be prepared for the future.

Different people have different needs based on their age, income level and personal choices. Irrespective of the differences, financial planning doesn’t necessarily need to begin with Savings, but rather should be aimed at generating and accumulating wealth. Like any other plan, the foremost aspect is to ensure oneself and their family is protected. It would be ideal to consider the following aspects at the early planning stages:

Analyze your Projected Income vs. Expenditure: This would give an overall layout of how much money flows in, flows out and the balance which is either a Saving (+ve) or an Overdraft(-ve). Remember to include all Cash Inflows including Salary of other family members, Income from Property, Interest on FD’s and the like, as well as all cash outflows including Taxes, Debt payments, Insurance Premium payments and the like.

Create a Budget: A budget keeps track of the projected figures against that of your actuals. Having a budget beforehand gives insight as to where you are likely to reduce expenses or gain income. Regularly monitor your budget to have maximum output. A budget can be made Quarterly, Half-yearly or annually as per your preference.

Prioritize your Financial Needs & Goals: As you advance up the income ladder, your needs grow too. For example, educating children, building a home, purchasing a vehicle etc. would be the priorities for a young couple, whereas post-retirement income, pension, medical care etc. would be the priority for an elder couple. Regardless of the nature of needs, it is vital to prioritize these needs. This is where most people do not succeed. The concept is as simple as running towards two finish lines at once, you finish neither of the races in time. Prioritizing financial needs gives clarity on how much of your savings need to go into those needs currently. You can begin with categorizing your Short-term, Mid-Term and Long-Term needs and then begin arranging them.

Focus on Wealth Accumulation towards Wealth Creation: Savings doesn’t further the purpose of Wealth Creation; it only serves short term Wealth Accumulation. Creating wealth requires making smart investments and taking a certain level of considered risk with your savings. Traditional tools like Fixed Deposits, Real Estate, Gold etc. may however serve your purpose, but on the long run it is always smarter to invest in the financial instruments available in the market. This is simply true based on the fact that funds invested in financial markets yield higher levels of Wealth creation.

Execution: The most important step in Financial Planning is executing the plan. Efficient execution comes with a disciplined approach towards managing finances and focusing on achieving the goals set. It would be ideal to plan and execute it with the help an experienced Financial Planner with knowledge and capability to handle finances well.

Monitor your Progress: A financial plan isn’t set in stone. Like everything else, it needs adequate maintenance from time to time. A good financial plan requires constant monitoring and making necessary changes as required. Wealth creation is a dynamic process that needs your regular attention.

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