Contrary to popular belief, financial planning does not end at just investing. Though the importance of investing is huge, it is equally important to create a financial plan. Without a financial plan in hand, you are just investing for the sake of it without actually achieving any gains.
What is financial planning?
Financial planning is a comprehensive assessment of an individual’sexisting pay and future financial condition by using existing known variables to predict future income, asset values and withdrawal plans. It is the procedure of making a personal roadmap to reach certain goals for the financial well-being of an individual.
The entire procedure of financial planning should aid to answer three questions, namely:
- Where are you currently? – your recent personal balance sheet
- Where do you intend to be in the future?- finances linked to your financial goals
- What should you do to reach there? – the asset allocation and the investment strategy that will aid you to achieve those goals
Importance of financial planning
- Financial planning ensures harmony between incoming and outgoing of assets
- It guarantees adequate funds
- It provides directions to an investor’s goals and dreams
- It encourages you to consider inflation and manage your expenses in a better way
- Financial planning provides the much-needed discipline required to manage your money
- Financial planning helps to plan one’s future
- It helps to improve the return on investment (ROI) on your financial portfolio
- Financial planning helps to identify financial errors
- It helps to increase one’s cashflow by monitoring their spending patterns and the nature of expenses
- Financial planning helps to secure the financial future of you and your family
Procedure to create a financial plan
Following is a step-by-step procedure to create a financial plan:
- Understand the current financial situation – Those who wish to start financial planning must understand their current financial condition. It is recommended to understand the source of assets, income, liabilities, debt, etc to provide a clear picture of one’s financial condition.
- Understand your financial goals – An individual must list their current and future financial goals and objectives. After understanding your needs, it is recommended to prioritise each goal and assign a time period to these goals. By doing this, one would be able to differentiate their short-term and long-term goals and capital required to achieve these goals.
- Keep a tab of the financial gaps – Once an individual understands their current financial situation and where they intend to be in the future, they would be able to understand the financial gaps.
- Create your financial plan – After evaluating the current financial status, goals, and financial gaps, it’s time to create a financial plan. It’s recommended to review different investment options such as mutual funds, PPF, stocks, fixed-income securities etc. and understand which security or a combination of securities best suit your portfolio.
- Start implementing your financial plan and reviewing it regularly–Once you have created a financial plan, make sure to put thingsinto action. Also, make sure to regularly review your plan.
With different types of investment available at one’s disposal, remember to choose one that best suits your needs. Creating a financial plan is a personal activity. However, do not shy from seeking help from an expert or a financial advisor to create a financial plan. Happy investing!