One of our clients said “I am just concentrating on the Comprehensive Financial Plan you have prepared and advised me. I am relaxed. I have no anxieties and am having a peaceful sleep. I am confident that we will be able to maintain our current standard of living after retirement also.”
I am feeling good when clients are sharing their experience and views about comprehensive financial plan. Really excited!
I used to interact with many people across different sections of society who comes to us for personal financial advice. It’s a question that remains dominant in the interaction.
One common question I come across is what is financial planning? Is it important for me? I want to provide an answer for this question through this page, what is financial planning? Is it important for me? Every day we talk with clients about our financial planning process. I’m pleased to share the information with you all.
What is financial planning?
Financial Planning is the process of determining ways to earn, save and spend money and the amount you need to earn, invest and spend. By planning your finances, you manage your money such that you reach your life goals.
Contrary to popular belief, financial planning is not just investing. It is a process. It allows you to manage your finances in such a way that you link it to your goals.
Financial Planning plays an important role in different aspects –
It provides direction to your goals or dreams. Financial planning helps you understand your goals better in terms of why you need to achieve these goals and how they impact other aspects of your life and finances.
Financial planning encourages you to manage inflation. You are aware of the price of various things and activities. You plan your budget in a better manner.
Financial planning makes you disciplined towards money. You do not spend unnecessarily. You keep a check on your savings and spending.
By planning your finances, you plan for the future. You are able to gain visibility into your finances in the future. You have a fair idea of how much money would you have, say ten years down the line. You would be aware of the returns your investments should earn to achieve your goals.
What about peace of mind – At the end you are getting peace of mind. Relaxed.
Is it important for me and my family?
Yes, it is important for you and your family. It is correct to say it is must for everyone to do ‘Comprehensive Financial Plan’ (60-70 Pages written financial plan).
Importance of Financial Planning in every aspect of finance ~
It is important to plan finances in order to reap long-term benefits through the assets in hand. The investments that one makes are structured properly, and managed by professionals through financial planning. Every decision regarding our finances can be monitored if a proper plan is devised in advance. The following points explain why financial planning is important.
♦ Cash Flow: Financial planning helps in increasing cash flow as well as monitoring the spending pattern. A pivotal step in the financial planning process is cash flow analysis. When you check the Income-Expenditure Flows, then you can understand your money relationship with your own money.
By the end of the cash flow analysis you should have a great idea about how your cash flow situation impacts your ability to achieve your goals and objectives, and what you can change in order to change your financial future.The cash flow is increased by undertaking measures such as tax planning, prudent spending, and careful budgeting.
After analysis of your cash flows, you have to create a written budget which will help you to achieve your financial goals.
Now you are asking yourself the most important question about financial plan and budget.
What’s the difference between a financial plan and a budget?
Financial plans and budgets can help you be financially successful now and in the future say another 30-40 years or till end of your life. Yet, while the two go hand-in-hand, they are not the same. Here are some key differences to help you distinguish between your budget and your financial plan:
-Where you’re going v/s. Where you are today: While a budget helps you map out your key expenses and plan for the weeks and months to come, a financial plan allows you to set a course toward funding financial goals that are 5, 10, 20 or 30 years down the road. A good financial plan may address your income and expenses, taxes, insurance, estate planning, retirement, education needs, and other topics.
~Strategies vs. Tactics: Creating a financial plan requires building a long-term strategy for getting you where you want to go, while building a budget means money management for the day-to-day. However, having a grasp on how much money to budget once your expenses are paid lets you know how much money can be put toward the goals defined in your financial plan.
~Long-term vs. Short-term: With a financial plan, you typically track your progress on a quarterly or semi-annual basis. With a budget, you record your income and expenses on a weekly or monthly basis. Generally, the closer you stick to your budget, the more progress you will make on your financial plan.
♦ Capital: A strong capital base can be built with the help of efficient financial Thus, one can think about investments, and thereby improve his financial position. Whatever the financial goals you want to achieve in your life – children education, daughter’s marriage, foreign vacation, buying your dream home or retirement planning etc., you have to create a corpus or capital for all these financial goals.
Increase cash flows by carefully monitoring your spending patterns and expenses. Tax planning, prudent spending and careful budgeting will help you keep more of your hard-earned cash.
♦ Income: It is possible to manage income effectively through planning. Managing income helps in segregating it into tax payments, other monthly expenditures, and savings.
When you have a comprehensive financial plan, you manage your income better. You are aware of how much you earn from salary, interest earned, dividends etc. This will help you to understand how much you are earning and if it is enough to earn to achieve your objectives. (if you have a choice or if you don’t have a choice at all)
♦ Family Security: Financial planning is necessary from the point of view of family security. The various policies available in the market serve the purpose of financially securing the family.
Providing for your family’s financial security is an important part of the comprehensive financial planning process. Having the proper insurance coverage and policies in place can provide peace of mind for you and your loved ones.
♦ Investment: A proper financial plan that considers the income and expenditure of a person, helps in choosing the right investment policy. It enables the person to reach the set goals.
A proper financial plan considers your personal circumstances, objectives and risk tolerance. It acts as a guide in helping choose the right types of investments to fit your needs, personality, and goals.
A financial plan will help to choose the right investments as per your income capacity, risk profile and goals. The financial plan will have the investment portfolio and asset allocation details. This can help you to have a balanced portfolio at all times.
♦ Taxation – Thinking about taxes in the last week of March is not a prudent idea. With a financial plan, you can assess your tax outgo at the beginning of the financial year. You can plan your finances such that you pay the least amount of tax in a legal manner.
♦ Standard of Living: The savings created by through planning, come to the rescue in difficult times. Death of the bread-winner in a family affects the standard of living to a great extent. A proper comprehensive financial plan acts as a guard in such situations, and enables the family to survive hard times.
For example, you can make sure there is enough insurance coverage to replace any lost income should a family bread-winner become unable to work.
♦ Retirement – We all want a carefree, relaxed retirement. It is possible only if you plan your finances such that your lifestyle is taken care of. You should have cash reserves to take care of medical expenses and other emergencies. A proper financial plan will have the retirement goals listed and the income, expenses and investment details. This will help you determine steps to achieve your goals.
♦ Financial Understanding: The financial planning process helps gain an understanding about the current financial position. Adjustments in an investment plan or evaluating a retirement scheme becomes easy for an individual with financial understanding.
Better financial understanding can be achieved when measurable financial goals are set, the effects of decisions understood, and results reviewed. Giving you a whole new approach to your budget and improving control over your financial lifestyle.
♦ Assets: A nice ‘cushion’ in the form of assets is what many of us desire for. But many assets come with liabilities attached. Thus, it becomes important to determine the true value of an asset. The knowledge of settling or canceling the liabilities comes with the understanding of our finances. The overall process helps us build assets that don’t become a burden in the future.
♦ Savings: It is good to have investments with high liquidity. These investments, owing to their liquidity, can be utilized in times of emergency and for educational purposes.
It used to be called saving for a rainy day. But sudden financial changes can still throw you off track. It is good to have some investments with high liquidity. These investments can be utilized in times of emergency or for educational purposes.
♦ Estate Planning – Estate planning refers to the provisions made regarding your wealth and its distribution smoothly after your death. The amount of wealth is not important here but the details regarding how assets and liabilities are to be taken care of is important. The financial plan will have a broad outline of what is to be done so that those taking care of your finances know what steps are required to be taken to manage your estate.
♦ Ongoing Advice: Establishing a relationship with a Certified Financial PlannerCM you can trust is critical to achieving your goals. Your financial planner will meet with you to access your current financial circumstances and develop a comprehensive plan customized for you.
♦ Ups and downs of Financial Status – There are many changes in our life. You get married, you can lose your job, you win a lottery or a loved one becomes critically ill. You make some money decisions which affect your standard of living. Such changes can lead to positive or negative changes in your financial status. Financial planning anticipates financial requirements in different conditions – change of your life stages or life situations and ensures smooth financial flow at all times.
Of course, it is not possible to predict the future. But a sound financial plan will help you and your loved ones to tide over the good and bad.
The plan provides not only direction, but also an integrated strategy to try and better your overall financial life over time. As the years go by, this approach may do more than “make money” for you – it may help you to build and retain lifelong wealth.
“Money is multiplied in practical value depending on the number of W’s you control in your life: what you do, when you do it, where you do it, and with whom you do it.” ~Timothy Ferriss
I am a CERTIFIED FINANCIAL PLANNERCM , CHARTERED WEALTH MANAGER®. For the moment, I have shared my experience growing up with you because it had a tremendous impact on how I do what I do.
If you have a question about your own financial situation please connect with me. I’d be delighted to try to be of service.
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