Financial Planning: Definition, Benefits, Objectives, Importance (2024)

Our life is like a rollercoaster ride, with many ups and downs, and financial planning is a tool that can help you smoothen your ride. Whether you have started your job or are in your 30s or 40s, financial uncertainties can come from anywhere, so it is important to have a good financial plan to secure your future. Financial planning helps you build a roadmap for your financial journey to achieve your financial goals.

This blog will explain key financial planning details, importance, and benefits. We will also explain the steps to go about financial planning and create your own financial plan to achieve all your goals.

What Is Financial Planning?

Financial planning is the process that helps in managing your financial resources to achieve your long-term or short-term goals. It entails assessing your current financial situation, establishing financial goals and risk appetite, and devising a strategy to achieve those goals. It helps you in making informed decisions to allocate your funds.

Simply put, financial planning helps you keep your finances in control to achieve all your goals and desires. To understand more about financial planning, let’s take a closer look at its types, objective, importance, and benefits.

Financial Planning Types

Financial planning is done to achieve your future goals, including investment, tax saving, retirement, education, etc. The basis on these, some of the common types of financial planning are:

  • Investment Planning: Under investment planning, strategies are made for future investments. You can plan for the type of investment and the proportion of investment you want. You can allocate your funds to various investment vehicles such as mutual funds, NPS, ELSS, etc.
  • Tax Planning: Financial planning also helps in solving your tax issues. Under tax planning, financial strategies are made to decrease tax liability. For maximum tax savings, you can plan to invest in fixed deposits, NPS, PPF, ELSS, etc.
  • Retirement Planning: Under retirement planning, strategies are made to ensure you retire rich. At the time of retirement, you need a huge corpus to fund your lifestyle for 20-30 years, and retirement planning helps achieve it. It will help you estimate the amount you would need to retire and how much you should invest in making it possible.
  • Budgeting: Under budgeting, your income and expenses are analyzed, and on the basis of that, financial plans are made. It is focused on minimizing costs and debts and increasing your disposable income.
  • Insurance Planning: Insurance provides financial assistance in times of emergency. Insurance planning helps you identify the type of insurance you require and how much your insurance should cover.
  • Education funding planning: Financial Planning for education has become increasingly important as the expense of higher education in India has skyrocketed over the years. Financial Planning in advance for education expenses ensures that you don’t compromise on your goals.

    Whether it’s for a child’s college education or your own academic aspirations, education funding planning helps you to accumulate funds for future education.

    Estate planning: Estate planning is basically a financial plan that helps you pass on your assets smoothly to your loved ones after your death. It helps to avoid family feuds and disagreements about who gets what.

    Making a will is an important part of estate planning, as it helps in avoiding family feuds regarding the property or assets. It gives the roadmap regarding the distribution of assets among the family members after your death.

    Wealth creation: Financial planning also helps in wealth creation through effective budgeting. It helps you to track your income and expenses. By keeping track of your spending and controlling unnecessary expenses, you can have more surplus for the investment.

    You can invest this surplus in various investment instruments, such as equity, mutual fund, NPS, etc., to generate more wealth in the long term.

Objectives of Financial Planning

  • Preparing a budget: Financial planning helps you prepare the personal budget that fits your financial plan. It enables you to track your income and expenditure and minimizes your expenses.
  • Determine current financial position: Financial planning helps determine your current financial position by analyzing your current income, expenses, and liabilities. It considers your future goals and helps you create an investment plan to achieve them.
  • Setting up financial goals: It helps you identify your financial goals. These goals may include retirement savings, buying or constructing of home, children’s education or marriage, etc.
  • Setting up financial plans: Financial planning allows you to take action to achieve your short- or long-term goals. It lays down the various investing strategies you can use to achieve your financial goals.
  • Review financial plans: It is mandatory to monitor your financial plans regularly so that it is aligned to achieve your goals. Financial planning helps you in reviewing your portfolio performance.

Financial Planning: Importance And Benefits

All of us have a long list of things that we want to do with our money. This could include saving tax, buying the latest smartphone, laptop, car, and properties, saving for children’s education, retirement planning, and so on.

However, more often than not the money we have with us is inadequate to fulfill all our goals. So, it becomes crucial to be clear about our priorities. And to that end, financial planning can come in handy.

The importance of financial planning is that it provides direction to our goals. Financial planning helps you understand your goals better in terms of why you need to achieve these goals and how they impact other aspects of your life and finances. Moreover, financial planning also brings benefits like a smoother transition into different life stages, staying prepared for emergencies, better tax planning, etc.

Let’s look at the benefits of financial planning in detail.

Smoother Transition Into Different Life Stages

Our priorities and responsibilities keep changing when we move from one life stage to the other. Financial planning helps us figure out how we can manage our finances at different stages of life such as bachelor days, married life, post-retirement life, etc.

Helps Stay Prepared For Emergency

Creating an emergency fund is a critical aspect of financial planning. With an emergency fund, you ensure that you have enough corpus that can help you survive for at least 9-12 months of your monthly expenses. This way, you don’t have to worry about money in case of any family emergencies, pay cuts, or job loss.

Helps In Calculating The Right Insurance Cover

Term insurance and health insurance are extremely useful in the case of an unfortunate demise and a health emergency, respectively. But what is important is to take the right insurance cover. A financial plan will take into consideration multiple factors like your income, expenses, loans, responsibilities, etc., and help you decide on the right insurance cover.

Better Tax Planning

Many of us pay a substantial amount of our salary as tax. But there are legal ways to lower the tax outgo. In fact, the Indian Income Tax Act provides various investment options to build wealth with the saved tax. But most of the time people make the mistake of making tax-saving investments that are not in line with their goals. It happens because they do not consider tax planning to be a part of a financial plan. By planning your taxes in advance, you can identify suitable tax-saving products, reduce your taxable income and build wealth for the long term.

Attain Peace Of Mind

Financial planning takes care of many moving pieces of your finances. You have adequate funds to manage your money. There is insurance to deal with unfortunate events. And you have a plan in hand to achieve long-term and medium-term goals. All these things give you much-required peace of mind as you are managing your money efficiently.

Now that we know the importance and benefits of financial planning, let’s understand the steps of financial planning with examples.

4 Key Steps Of Successful Financial Planning

To help you get started with financial planning, let’s take a look at the key steps involved in the process. We will describe in brief what these steps are and then explain them with an example.

Step 1 – Set SMART Goals

This step in financial planning involves defining your financial goals. And while you do it, you have to be SMART (Specific, Measurable, Attainable, Relevant, and Timebound). For example, just saying that you will retire rich is not a SMART goal. But accumulating Rs. 5 crores for post-retirement life by the age of 60 is a SMART goal.

When you write down goals this way, it helps you prioritize the most important goals in your life. You also become realistic about your goals and work vigorously to achieve them.

Take for example the above goal of accumulating Rs. 5 crores by the age of 60. Say, the person is 35 years old. So he has 25 years to achieve this target. Now, all he needs to find out is how much he has to invest and what kind of returns he needs to earn.

Here is a table that explores various possibilities to reach the target of Rs. 5 crore in 25 years:

Required Rate Of ReturnMonthly Investment Amount Required
7%Rs. 52,500
10%Rs. 37,500
12%Rs. 26,500

Step 2 – Budget Your Expenses

To ensure that you get to your goals securely, you have to invest as much as possible. It will be possible only when you cut down on discretionary spending or avoidable expenses and use those savings to invest more.

Step 3 – Find Out Where To Invest

This step involves figuring out where to invest. For instance, if you are investing for long-term goals you can invest in equities, whereas for short-term goals, you can invest in low-risk products like fixed deposits or Debt Funds.

Overall, your investment plan will have a mix of different assets like Indian equity, international equity, debt, and gold. The mix of this asset allocation will depend on your risk profile, which involves assessing how much risk you can take. For instance, you need to find out if you are comfortable with a 20-30% decline in your portfolio. If the answer is yes, you can invest in equity. But if the answer is no, you have to minimize your allocation to equities.

This assessment of how much risk you can take is done by factoring in multiple variables such as your age, income, lifestyle, loans, responsibilities, etc. Determining your risk profile also involves assessing your personality based and how you react to adverse events.

The old-school way of risk profiling an investor has been labeling them as Conservative, Moderate, or Aggressive. At ET Money, we never understood that. Nor we do now. We looked at this deeper and came up with a dynamic risk score. You can find out your risk score and unique personality here.

Step 4 – Monitoring And Rebalancing

An investment plan is not a one-time thing that you create and forget. After making the investment plan, you will have to keep tracking your progress toward different goals. From time to time, you will need to weed out the underperforming investments and include emerging investment opportunities. You will also need to rebalance your asset allocationfrom time to time. Otherwise, your investments may digress from the original asset allocation and consequently lead to counterproductive outcomes.

Reasons for Financial Planning

Financial planning is a very important part of every individual, as it helps to achieve financial goals, secure their financial future and provide financial stability. Here are some of the reasons for making a financial plan:

  • It helps you to set up your financial goals, such as buying a house, car, savings for children, etc, and work toward specific financial goals.
  • It helps you create a budget that enables you to cut unnecessary expenses, reduce debts, and increase disposable income.
  • It encourages regular saving and investment, through which you can accumulate a good corpus in future by investing regularly.
  • At retirement, you require a regular flow of income. With you can build a good retirement corpus, through which you can have regular income to fund your daily expenses.
  • It helps you to minimise your tax liabilities by allocating your money to various tax-saving investments.

Financial Planning Tips for Different Sections

Financial planning enhances financial stability and helps you achieve long-term financial goals.

So, irrespective of whether you are a salaried individual planning for retirement or self-employed, it is important for everyone to have an effective financial plan to secure your future.

Let’s understand how the different types of individuals can build an effective

Financial Planning for Salaried Employees

For salaried employees, having a robust financial plan is crucial to achieving financial goals. Here are some tips for having a good financial plan:

  • You can create a budget to track or manage your savings, expenses, and investments.
  • Consider investing in mutual funds, which offer you a diversified portfolio of investments.
  • Ensure you have health insurance coverage for yourself and your family to avoid future unexpected expenses.

Financial Planning for Retirement

If you are planning for retirement, you should have perfect financial planning that ensures you receive regular cash flow after retirement. Here are some tips for retirement planning:

  • You can consider investing in NPS (National Pension System). It is a market-linked investment offering a diversified portfolio of various asset classes. It comes with the dual benefit of taxation and a regular pension after retirement.
  • If you don’t want to take higher risks, then you can consider PPF (Public Provident Fund). It is a government-backed tax saving scheme that offers you a guaranteed investment return.

Also Read: Retirement Strategies to Have Regular Income

Financial Planning for Self-Employed Individuals

If you are self-employed, it is also important to have your financial plan to remain protected from any financial insecurity in future. Here are some tips for self-employed individuals:

  • You can create your own budget and track your income and expenses.
  • You should explore investment options like mutual funds to have a decent corpus for your future.
  • You should have adequate health insurance coverage for yourself and your family members.

Difference Between Financial Planning and Wealth Management

Financial planning is the process of making a comprehensive plan for managing day-to-day expenses and income to achieve your financial goals. While wealth management is concerned with managing your existing wealth and making changes in your portfolio to grow your wealth.

Let’s understand how financial planning and wealth management are different from each other by the following table:

Financial Planning Vs Wealth Management

Basis

Financial Planning

Wealth Management

Objective

Managing income and expenses to achieve financial goals and ensure financial security.

To manage existing investment to earn maximum return.

Scope

It includes managing monthly expenses, tax saving, tax planning, retirement planning, etc.

It includes making new investments, asset allocation, portfolio balancing, etc.

Type of management

Passive management, as you make your financial plan for the long term and work on it.

Does not require frequent monitoring.

Active management, as you have to monitor and manage your investments regularly.

Financial decisions

Taken on the basis of financial goals, income, expenses, risk tolerance, etc.

Taken on the basis of an existing investment portfolio.

Conclusion

Financial planning is all about designing a trip that gets you safely to your destination. In this blog, we have explained the importance of financial planning. We have also explained how can you go about financial planning with examples. But a financial plan on paper is of no use unless you start acting on it. The earlier you start acting on your financial planning, the less complicated and the higher the chances of achieving your financial goals. So why the delay?

We hope you found this article useful. If you did, please share it with your friends and family and help us reach more people. If you have any questions or you need clarification on what we have written in this blog, do ask us in the comment section below, and we will respond.

FAQs for Financial Planning

What are the elements of a financial plan?

Some of the key elements of the financial plan are budgeting, insurance coverage, tax planning, debt management, long-term savings, etc.

What is the objective of a financial plan?

The objective of a financial plan is to provide a roadmap to manage your financial resources to achieve your financial goals in future.

What is a Comprehensive Financial Plan?

The comprehensive financial plan is a detailed plan that encompasses all components required in the individual’s financial journey. It goes beyond merely setting goals and creating budgets. It includes planning for financial goals, tax planning, estate planning, retirement planning, insurance coverage, and short and long-term investment strategies, etc.

Why is it necessary to create a Financial Plan?

It is important to create a financial plan, as it provides you with the roadmap to manage your finances, which helps you to achieve your financial goals in the long term. It helps you prioritise your expenses and save for the future to have financial stability.

What is personal financial planning?

Personal financial planning is the same as normal financial planning, wherein you make a roadmap about managing your income and expenses to achieve your financial goals.

What is budgeting in financial management?

Budgeting refers to the financial process in which you track your income and expenses, and based on these, you allocate your money. Here, the primary objective is to minimise expenses, eliminate unnecessary expenses, and increase disposable income.

What is financial planning in financial management?

Financial planning in financial management is the strategic process of aligning your financial resources and decisions with your financial goals. It includes aspects like setting financial objectives, risk assessment, investment planning, and considering tax implications. It’s about creating a holistic strategy to maximise the efficiency and growth of your financial assets.

What is long-term financial planning?

Long-term financial planning refers to making a financial strategy for a longer tenure, typically five years or more. It may include making plans for long-term goals such as buying a home, funds for children’s education or marriage, etc.

What is short-term financial planning?

Short-term financial planning refers to making a financial strategy for a shorter term, typically 1 to 3 years. It can be done for various short-term goals such as savings for vacation, debt payment, paying bills, etc.

I am a seasoned financial planning expert with extensive experience in managing financial resources to achieve both short-term and long-term goals. My expertise lies in assessing current financial situations, setting financial goals, and devising comprehensive strategies to achieve those goals. I have a deep understanding of various aspects of financial planning, including investment planning, tax planning, retirement planning, budgeting, insurance planning, education funding planning, estate planning, and wealth creation.

Now, let's delve into the key concepts mentioned in the article about financial planning:

1. Financial Planning Types:

  • Investment Planning: Involves strategies for future investments, including allocation to mutual funds, NPS, ELSS, etc.
  • Tax Planning: Focuses on strategies to decrease tax liability, utilizing investments like fixed deposits, NPS, PPF, ELSS, etc.
  • Retirement Planning: Strategies to ensure a financially secure retirement, estimating required corpus and determining investment amounts.
  • Budgeting: Analyzing income and expenses to create financial plans focused on minimizing costs and debts.
  • Insurance Planning: Identifying necessary insurance types and coverage amounts for financial assistance in emergencies.
  • Education Funding Planning: Planning for education expenses in advance, ensuring funds for future education goals.
  • Estate Planning: Creating a financial plan to smoothly pass on assets to loved ones after death, including making a will.
  • Wealth Creation: Using effective budgeting to track income and expenses, invest in various instruments, and generate long-term wealth.

2. Objectives of Financial Planning:

  • Preparing a Budget: Creating a personal budget to track income, minimize expenses, and determine disposable income.
  • Determining Current Financial Position: Analyzing current income, expenses, and liabilities to create an investment plan.
  • Setting up Financial Goals: Identifying and prioritizing financial goals such as retirement savings, home purchase, education, etc.
  • Setting up Financial Plans: Taking action to achieve short- or long-term goals by laying down investing strategies.
  • Reviewing Financial Plans: Regularly monitoring financial plans to ensure alignment with goals and reviewing portfolio performance.

3. Financial Planning: Importance And Benefits:

  • Smoother Transition Into Different Life Stages: Adapting financial plans to changing priorities and responsibilities.
  • Helps Stay Prepared For Emergency: Creating an emergency fund to cover at least 9-12 months of expenses.
  • Helps In Calculating The Right Insurance Cover: Determining suitable insurance cover based on various factors.
  • Better Tax Planning: Identifying legal ways to lower tax outgo and making tax-saving investments aligned with goals.
  • Attain Peace Of Mind: Managing various aspects of finances provides peace of mind.

4. 4 Key Steps Of Successful Financial Planning:

  • Step 1 – Set SMART Goals: Defining specific, measurable, attainable, relevant, and time-bound financial goals.
  • Step 2 – Budget Your Expenses: Cutting down discretionary spending to invest more towards goals.
  • Step 3 – Find Out Where To Invest: Deciding on investment options based on goals, risk tolerance, and asset allocation.
  • Step 4 – Monitoring And Rebalancing: Regularly tracking progress, weeding out underperforming investments, and rebalancing asset allocation.

5. Reasons for Financial Planning:

  • Setting Up Financial Goals: Achieving specific goals like buying a house, car, or saving for children.
  • Creating a Budget: Minimizing expenses, reducing debts, and increasing disposable income.
  • Encouraging Regular Saving and Investment: Accumulating a corpus for the future by investing regularly.
  • Ensuring Regular Income at Retirement: Building a retirement corpus for a regular flow of income.

6. Financial Planning Tips for Different Sections:

  • Financial Planning for Salaried Employees: Creating a budget, investing in mutual funds, and having health insurance coverage.
  • Financial Planning for Retirement: Considering NPS or PPF for regular pension after retirement.
  • Financial Planning for Self-Employed Individuals: Creating a budget, exploring investment options, and having health insurance coverage.

7. Difference Between Financial Planning and Wealth Management:

  • Financial Planning: Concerned with managing day-to-day expenses and income to achieve financial goals.
  • Wealth Management: Concerned with managing existing wealth and making changes in the portfolio to grow wealth.

In conclusion, financial planning is a crucial aspect of achieving financial stability and long-term goals. It involves a strategic approach to managing income, expenses, and investments to secure one's financial future.

Financial Planning: Definition, Benefits, Objectives, Importance (2024)

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