Financial planning refers to the process of examining one’s finances, setting appropriate financial goals and laying out actions required for achieving the goals. It is not a one-time activity, but a continuous process that ensures an individual’s finances are managed wisely. Many confuse financial planning with retirement planning. The two are not the same. Retirement planning is limited to setting aside funds to meet the retirement stage of life. Financial planning is broader in its scope. It encompasses visualizing all financial needs of the future like children’s education, marriage, housing loan, medical emergencies and so on. The needs are prioritized and also categorized into short term, medium-term, and long term goals. Proactive steps are devised and implemented to meet these financial goals.
The rich hire expert financial planners to help them. How about the normal person? Financial planners and other qualified professionals offer services such as tax planning, budgeting, estate plans, and investing but are highly expensive. The truth is financial planning is no rocket science. You can come up with an effective financial plan for your future provided you put in the required effort and discipline.
Let’s dive into the steps you should follow to create a sound financial plan for the future.
A 4-step approach to financial planning
- Understand your financial needs – the First step is to gain a clear understanding of your short, medium, and long term financial goals. You might want to save money to buy that new car or maybe save money for your housing loan down payment. You also might want to create a retirement corpus. Whatever be the needs, make a list to get a clear picture of your financial needs.
- Assess your assets and liabilities – Take stock of your existing assets and liabilities. You can evaluate the soundness of your current financial position with this exercise. This also gives you an understanding of how close you are to meeting your financial goals.
- Develop a financial plan – Considering your financial goals and the current financial situation, you can develop a plan for achieving the goals. Choose the financial instruments that you can invest in and try to maintain a diversified portfolio. Periodic payment plans like mutual funds are great instruments that promote savings and at the same time create wealth due to the higher ROI. These funds let you reap the value appreciation of the capital market without exposing you to its risks.
- Implement the plan and stick to it – Most people are great planners, but when it comes to executing the plans, they fail due to lack of self-discipline. Remind yourself of the monthly commitments and make it a point to meet the commitments. End of the day, you are the one who is going to gain from it. A periodic review of the plan can be done on a half-yearly or yearly basis and any adjustments required should be made. The discipline and commitment that you show by sticking to your financial goals will reap definite future benefits.
Financial planning is not as tough as it sounds. These simple steps if followed religiously are all you require to secure your financial future. You can save wisely, invest wisely and be happy knowing that there is something for the rainy days.