Release date August 28, 2020
Financial planning, personal finance
Managing wealth is a difficult task, and personal financial planning becomes increasingly important over time. People need a strategy for managing their money these days because markets are becoming uncertain and it is not easy to predict the future. So this article will help you manage your money more strategically.
What is financial planning?
Personal finance is the financial management or planning of expenses, investments and savings for individuals and family members. Financial planning includes budgeting, banking, insurance, mortgage, investing, retirement planning, taxes, and estate planning.
Importance of Financial planning
- Financial planning helps to meet our money needs – Financial planning helps develop a plan that will allow us to manage our income and expenses so that we can meet our money needs on time.
- Income – expenses, savings and investments – A person should always divide their income into three parts; it would help him plan over his expenses in order to save enough money to invest for his future needs.
- Better tax planning and cash flow improvement – Proper planning can reduce unwanted expenses that increase cash flow and save taxes.
- Security for a person and his family – In most cases the family depends on one or a few people. So if there is poor financial planning, it can lead to financial difficulties and people who are dependent on it can also be affected.
- Helps Avoid Unmanageable Debt – With proper planning, there would be more savings and a person would have to borrow less, which would help them avoid unwanted debt.
- Asset growth – With an appropriate investment strategy, the value of a person’s wealth grows over time.
- Improves the standard of living – More savings mean more money, which would lead to an improved standard of living.
- Prepares for emergencies – The future is unpredictable and a situation like COVID-19 can occur without warning. Financial planning allows a person to be prepared for such conditions in advance.
Steps to financial planning
- Define financial goals – – The goals and targets should be clearly defined. They should be quantifiable, have clarity, determine the time frame, distinguish between needs and wants, and be achievable. These should be well documented so that you can track them in the future and make changes as the market changes.
- Collect financial and personal information – All relevant information about your finances should be gathered, and the quality of the information is important in creating a good financial plan. The information should include your income, expenses, assets, liabilities, risk appetite, tolerance and capacity.
- Analysis of financial and personal information – Organize the information provided in step 2 to reflect your financial situation. Some of the metrics you can use to analyze the information are Solvency Ratio, Debt Ratio, Liquidity Ratio, Savings, Ratio. This is a great way to measure your risk appetite, tolerance and capacity. This helps in assessing your asset allocation for investment and retirement goals.
- Development and preparation of the financial plan – With the information in Step 2 and Step 3, the financial plan is developed, taking into account the goals and specifications specified in Step 1. The plan would include a statement of assets or balance sheet, annual tax payable, and cash flow statement, after you are convinced of the plan than to proceed to the final step.
- Implementation and review of the financial plan – After formulating the final plan, prepare an investment strategy. Once these measures have been implemented, they must be checked from time to time and changes made in line with market changes.
Features of a good financial plan
How do you rate the quality and effectiveness of your financial plan? Here is a checklist you can use.
- Does it indicate your current financial situation?
- Does it measurably list all of your goals?
- Does it set an investment strategy?
When professional help is sought, your financial planner will make sure that your financial plan also includes:
- List of possible risks and a risk management plan.
- Expected return on every investment.
- A mapping between the investments and goals, ie how each investment will help you achieve your goals.
- Information on one-time and recurring fees charged by him.
Personal financial management has become an integral part of one’s life. This becomes even more important in tough times like COVID-19. Financial planning requires adequate analysis, expertise and discipline. Hence, one should start financial planning early as it will help achieve financial goals and gain financial freedom, and may also appoint an advisor if desired for better understanding and planning.
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