Financial planning – explained!

Financial planning is an activity wherein individuals plan their income, expenses and investments so that their money works for them and gives them sufficient funds to meet their financial goals.

When it comes to financial goals, there are different goals which an individual usually has and for which he/she needs funds. The common financial goals of an individual include the following –

These are the financial goals which individuals might have. Planning for these goals is what constitutes financial planning.

Making a financial plan is a step-by-step procedure and one cannot create a suitable plan if the steps are not followed properly. So, here is a step-by-step guide towards creating a fool-proof financial plan for–

  • Identification of financial goals

The first step is to find out what the financial goals are so that individuals can create funds for them. Every individual’s financial goals are different and so one must assess his/her goals. Here’s what should be done –

  • The goals should be listed down
  • Their time horizon should be ascertained
  • The corpus required for each goal should be determined
  • Assessment of income and expenses

The next step is to find out the average monthly income, from all sources, and the monthly expenses. The aggregate income should be deducted from the expenses to find out the disposable income. This disposable income would be that which can be saved towards financial goals.

  • Assess your net worth

Net worth = Assets – Liabilities

Deduct the existing assets and liabilities to find out the net worth. An individual’s net worth is the financial savings that they have presently. Then they can figure out the additional funds required for their financial goals.

  • Ascertain your risk appetite

Risk appetite is the capacity to take risks. Individuals should invest according to their risk appetite so that they can tolerate the risks associated with investments.

  • Choose the investment avenues

Investment avenues should be chosen based on –

  • How much corpus is required
  • The investment horizon
  • Disposable income
  • Risk appetite
  • Current net worth

A diversified financial portfolio should be created with different types of investments so that the investment risk is minimized and return generating potential is enhanced. Individuals should choose both market-linked and fixed income investment avenues for a well- balanced diversified portfolio.

  • Tax planning

The last and the most important step in financial planning is tax planning. Tax planning helps in saving taxes. Individuals should choose suitable investment avenues with maximum tax saving benefits for maximizing wealth and also saving taxes in the process.

Financial planning is an art and if the above-mentioned steps are followed individuals can create a well-devised plan. It is not so difficult once the basics of financial planning are understood. Individuals can then build a financial portfolio around their goals. A well-drafted financial plan would help in meeting the goals timely and without any burden. Moreover, the financial plan should also be reviewed periodically so that it keeps pace with the changing lifestyle needs of individuals.