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Financial Planning: An Introduction

If you fail to plan, you plan to fail.

Read the above adage carefully. This is a very important bit of truth for any aspect of life. It is more so for your finances. If you fail to plan your finances properly, it is only a matter of time before you may find yourself in hot waters. It is here that the discipline of financial planning comes in handy.

Individual Finance is not a Game of Chance

Individual Finance is not a Game of Chance

What is Financial Planning?

Financial planning is the process of determining and understanding a person’s financial goals and priorities, an analysis of the resources and risk profile of the person, and detailing a realistic plan to meet the goals after such analysis.

On the basis of the above definition, we can break the process of financial planning into the following steps:

1) Determining the financial goals of the individual:  This means an assessment of where the person wants to go in terms of his finances and life. Such goals have to be quantified. It is not sufficient to say “I want to live comfortably after retirement“. You will have to be more specific, e.g., “I need a sum of Rs 25,000 per month to retire comfortably”.

2) Gathering the relevant information about the individual: Some amount of information is needed about the person relating to his finances and other aspects of personal life. This information should also be quantified as far as possible. For example, how much amount will you need for the higher education of your children? Or, what is the likely amount you will need for the marriage of your daughter?

Financial Planning

Financial Planning

3) Analyzing the Resources and the Risk Profile of the person:  This is the most crucial step of the financial planning. All the current and future sources of income are carefully assessed. Reasonable prudence should be exercised for this step, meaning that income should be estimated very conservatively. The other important aspect of this step is analyzing the risk profile of the person. The risk profile should factor not only the personal risk appetite of the person, but also his/her age . A younger person has a lower risk profile, all other things remaining the same.

4) Designing a Suitable Plan:  If the first step of this process specified the destination, this step determines the path that will lead to that destination. This involves considering various factors such as insurance, investments, taxes, estate planning and retirement planning. Suitable instruments and options are chosen for the attainment of the financial goal.

5) Implementation and Monitoring:  Last, but not the least, the financial plan is put into action. The necessary resources (money) are deployed in the specified manner. Careful monitoring is done, and any course correction is also done if the situation so demands.

Scope of Financial Planning:

Financial planning should cover all the likely aspects of a person’s financial needs. The scope of the process of Financial Planning includes (but is not limited to) areas like insurance, investments, retirement planning, taxes, estate plan(final will and testament) and education for kids.

Distinction from Personal Budgeting:

A lot of people confuse financial planning with personal budgeting. Both are different things. In fact, personal budgeting is only a part of the process of financial planning, albeit a very important one. Personal budget is simply the list of all planned incomes(revenues) and expenses, while also generating surplus for investments and savings. On the other hand, financial planning is a much more broader process, also including aspects like insurance, taxes and estate planning.

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4 Responses

  1. Yes, planning is necessary for success in life. Planning and hard work both are essential for the success.

    Mohan

  2. I have taken a hard copy of this article, I would like to distribute it to my friends. Very practical approach.

    • This is the biggest tribute and praise that I could ever expect. I am very happy that you could find the article to be of practical use. Thank a lot, Mr Sharma.