When it comes to financial planning and wealth management, most of you believe that creating savings is all that you require for fulfilling your financial plan. It is a misconception. What is personal financial planning? A personal financial planning process encompasses a wide range of activities which you need to carry out in order to achieve financial independence. It does not stop at savings. Do you know what these activities are?
Many of you, sadly, don’t! As it is essential, let’s understand financial planning and what it involves –
What is financial planning?
Financial planning is a process wherein you make financial decisions to meet the different financial goals of your life by managing your finances. Thus, financial planning involves making sensible and practical decisions about your money for future goals, not just creating savings.
What does financial planning involve?
Financial planning is a six-step process wherein you can plan for your finances and achieve financial independence. Let’s look at what are the six steps in the financial planning process–
1. You should estimate your current net worth – you should analyse and find out your assets and liabilities to arrive at your net worth. Your assets are your investments and other owned belongings which give you an income. Liabilities, on the other hand, are the debts which you have to pay off. Your liabilities should be deducted from your assets to find out your current financial standing. This is called your net worth which you should know.
2. You should chalk out your goals – goals are important as they dictate how much to save and for how long. A strategic financial planning process involves planning around some common goals such as marriage, child education, asset creation, buying a home, wealth maximization and retirement. Chalk out your goals based on your life stage. If your children are independent, your goal might be to create wealth and plan for retirement. On the contrary, if you have just started a family, planning for your child’s future might be an important goal. So, list out your goals to understand your financial requirements.
3. Find out your financial requirement – your goals help you find out the amount of money you need in life. Segregate your goals into short, medium and long-term to find out your investment horizon. Then choose investments whose tenure matches the horizon of your goals. . With goal planning, you can see when you need the money and invest accordingly. Don’t forget to factor in inflation. It has a direct bearing on the amount of money required to fulfil your medium and long-term goals.
4. Create a budget and stick to it – The next step is finding out your disposable income. Until and unless you know the income you can direct towards savings, you cannot create a portfolio. For maximum savings, create a budget. When spending, stick to your budget to avoid overspending. Budgeting helps you save more and meet your goals successfully.
5. Understand your risk appetite to know your investments – different investments have a different risk profile. Understanding of your risk appetite is important to find out in which assets you can invest. To understand your risk-taking ability, factor in your dependents, age, income, existing investments, etc. Once you know your risk profile you can choose equities if you are a risk taking investor or debt investments if you are risk-averse. Once you know your investment horizon and risk appetite you should pick the investment avenues. Some common and popular investment avenues include equity, debt, fixed-income, real estate, gold, etc. when picking assets, don’t stick to one asset class. Diversify. Diversification would help you spread your risk over different investments and minimize it. The returns, however, would be better.
6. Monitor and review your portfolio – financial planning is not a one-time affair. You need to monitor and review your portfolio from time to time. With time your financial requirements change. Your financial plan should be changed to factor in the change of your requirements.
Financial planning is a broad concept, an ongoing process and confusing it with only one factor of savings is wrong. Understand the entire financial planning process, follow it and achieve financial freedom.
Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.