Financial Planning

What is financial planning?

Financial planning is the process of developing a personal roadmap for your financial well being. The inputs to the financial planning process are:

a. Your Finances, i.e., your income, assets, and liabilities.

b. Your Goals, i.e., your current and future financial needs and

c. Your Appetite for Risk.

The output of the financial planning process is a personal financial plan that tells you how to use your money to achieve your goals, keeping in mind inflation, real returns, and taxes.

In short, financial planning is the process of systematically planning your finances towards achieving your short-term and long-term life goals.

Life goals

Most people nurture dreams of owning a bigger house or car, exploring the world, giving their children the best possible education, a blissful retirement, etc. Basically, these dreams are life goals. Consider this example. Mr and Mrs Shah, 35 and 32 respectively, have a three year old daughter. Both work in private sector companies. Mr Shah plans to retire when he’s 50. From their current one bedroom rented suburban Mumbai apartment, the Shah’s hope to move to their own two bedroom apartment costing around Rs 25 lakh within the next five years. They own a small car, for which they have availed of a loan. Mr Shah reckons that he will need Rs 15 lakh for his daughter’s higher education 15 years later. He also wants to build a corpus of Rs 75 lakh for his retirement.

While distinguishing short term goals from long term goals, you must keep in mind that, as a general rule, any life goal that needs to be met within five years can be considered as short term. Beyond that, any other goal can be classified as long term. By this classification, the Shah’s goals can be classified as follows:

Short Term Goals	Long Term Goals
2BHK Flat	Daughter’s Higher Education
	Retirement Corpus

Using a similar yardstick, you may classify your own life goals. Each of them needs financing. How you plan your finances, to have the right amount at your disposal at the right time, is what financial planning is about.

Importance of financial planning

Can you manage without financial planning? Many people do, but they may find—often when it’s too late—that they don’t have the means to achieve their life goals.

For example, people today realize the importance of living life to the fullest. Consequently, many opt for early retirement from full time jobs, as compared to a few decades ago, when most people worked until the maximum retirement age of 58-60 years.

The average person can, today, expect to live a healthy life well into his or her seventies or eighties, which means that retirement life is almost as long as working life. Financially, it implies that savings (after taking into account inflation) should be enough, not just to maintain the same lifestyle for almost 25-30 years, with no new income, but also to take care of medical expenses, which are usually high the older a person gets. Planning for all this is a tall order for anyone. That’s why it’s critical for everyone to plan their finances from an early age.
Benefits of financial planning
Here’s a list of the benefits that a well chalked out financial plan can bring about:
- Helps monitor cash flows and reduces unnecessary expenditure.
- Enables maintenance of an optimum balance between income and expenses.
- Helps boost savings and create wealth.
- Helps reduce tax liability.
- Maximizes returns from investments.
- Creates wealth and ensures better wealth management to achieve life goals.
- Financially secures retirement life.
- Reviews insurance needs and therefore also ensures that dependents are financially secure in the unfortunate event of death or disability.
- Lastly, it also ensures that a will is made.
Financial planning can help you achieve peace of mind since: