Do you know what is financial planning and why it is important for every investor ? Let me try and clear the cobwebs.
Everyone likes money. Everyone would like to be rich. Everyone has some desires and wants that money can fulfill. But very few people know how to get to these needs in a constructive manner in life. Some think making money is complex process, others find it very boring, some don’t want to tread into the challenges it brings while others are just not aware that they should.
All financial goals in life can be achieved by proper financial planning. Before we go ahead, let us understand what is financial planning.
Definition of what is financial planning
Financial Planning is defined as the process of meeting one’s financial goals by expert management of one’s finances. Financial Planning provides you with a blueprint which helps you realize all your dreams in life in a very systematic and planned manner without causing you any sleepless nights.
It gives you the confidence that you know you are on the right track and in safe hands and that you will have the money when you need it – when you want to buy a house or a car or when you want to get your daughter married or send her off for education. Or when you retire.
It’s a road map of your life’s financial goals. It could be budgeting for your finances, planning to spend according to that; it could be saving your current or future income in different investment avenues to make your wealth grow.
Process of financial planning
Financial Planning combines the elements of risk management, investment planning, tax planning and retirement planning to comprehensively plan for your future needs.
It involves the four pillars of personal finance – retirement, insurance, investment and tax planning. The process can be broken down as below.
Step 1 : Analyzing a person’s financial position
Questions to be asked during this stage is how much money does the investor have today and where that money is invested (these are his financial resources) and what are his financial problems.
For example, is he too much into debt and what are his financial goals in life. If a person wants to get married in 2 years time or wants to buy a car in 5 years time, these qualify as financial goals.
Step 2 : Developing a plan
The plan needs to be developed and will use the current resources wisely and the resources that are going to come in the future to make the investor’s money grow over a period of time with an amount of risk that he can bear.
Step 3 : Implementing the plan
This is nothing but buying and selling of financial products as documented in the plan.
Step 4 : Monitoring of the plan
This is to check and make sure that you are on the right track to achieve your goals. There could be events that require you to change your approach towards the goals in life. If you monitor your health every year or two, why avoid the same for your finances.
The above 4 step process will help you answer the question what is financial planning.
Presentation on what is financial planning
Here is a quick presentation I prepared on what is financial planning and it’s importance for investors. Read every page of it as it will provide you with some useful insight.
Can investors do financial planning themselves ?
After having understood what is financial planning, the next question you must be asking is – can I do it myself ? Yes, you can. You should if you can answer yes to the following –
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Can you cure yourself of an illness without the need to go to a doctor ?
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Can you repair your car yourself which was damaged in an accident ? (All right, you own the garage, I give this one to you !)
- Can you build your house without the help of contractors ?
If you answered no, then you probably should not do it yourself. This is a niche field and experts can handle it best. Why put your money at risk by trying to do it yourself when there are certified financial planners to help you in the process.
Investors seldom are disciplined for long term investing ideas and get bogged down by the short term financial needs of the household – buying a consumer durable, going on a short vacation or arranging money for next month’s loan payment. The long term planning of goals is forgotten and buried deep.
The general perception is that everything will take it’s own course and things will fall in place. Over a period of time, investors lose the momentum, direction, zeal and discipline to stay on course to achieve their dreams. Not to mention the fact that holistically planning your financial goals and parking your money in the right investments is the job of an expert who has the right financial knowledge.
Advantages of financial planning
The advantages of planning one’s finances are many. The investor can :
reduce his investment costs and improve his investment returns plan for retirement and children’s education and marriages lower income taxes organize his finances – spend, save and invest wisely- lower overall risk to himself
Did the above article help you to know what is financial planning ? If yes, can you share your thoughts ?
Ravi Shankar says
Very Good Article.Thanks Radhey.
Rohan says
yeah ! a good article indeed