Managing wealth is a difficult task, and personal finance planning is gaining more importance with time. People these days require a strategy for managing their money because markets are becoming uncertain, and predicting the future is not easy. So, this article will help you manage your money more strategically.
What is Finance Planning?
Personal Finance is the financial management or planning of one’s expenditure, investments, and savings for individuals and family members. Financial planning involves budgeting, banking, insurance, mortgages, investments, retirement planning, tax, and estate planning.
Importance of Finance Planning
- Financial
planning helps to meet our money needs – Financial
planning helps develop a plan that would help us manage our income and
expenditure in such a way that we meet our money requirements on time. - Income
– expenditure, savings, and investments – A person
should always divide his income into three parts; it would help him plan about
his expense to save enough money to invest for his future needs. - Better
tax planning and improves cash flow – Proper planning
will help you to decrease unwanted expenditure that would increase cash flow
and assist in saving tax. - Security
for a person and his family – In most cases, the family is
dependent upon one or few individuals, so if there is poor financial planning,
it may lead the person to financial distress and people dependent upon him
would also get affected. - Helps
in avoiding unmanageable debts – With proper planning, there
would be more savings and a person would have to borrow less, which would help
him to avoid unwanted debt. - Growth
of assets – With a proper investment strategy, the value of
a person’s assets will grow with time. - Improves
the standard of living – More savings means more money to
spend, that would lead to an improved standard of living. - Prepares
for emergencies – Future is unpredictable, and a situation
like COVID-19 can occur without warning. With financial planning, a person can
be prepared for such conditions in advance.
Steps for Finance Planning
- Defining
financial objectives and goals – The objectives and goals should be clearly defined. They should
be quantifiable, have clarity, identify the timeframe, differentiate between
needs and wants, and, achievable. These should be documented well, which will
help you track it in the future and make changes according to the market
changes. - Collecting financial and personal information – All relevant information related to your finances
should be collected and the quality of the information is important for
preparing a good financial plan. The information should include your income,
expenditure, assets, liabilities, risk attitude, tolerance, and capacity. - Analyzing financial and personal
information – The
information provided in step 2 is to be organized in a way that shows your
financial position. Some of the ratios you can use to analyze the information
are Solvency Ratio, Debt Ratio, Liquidity Ratio, Savings, Ratio. This will help
you measure your risk attitude, tolerance, and capacity. This helps to assess
your asset allocation for investment and pension goals. - Developing and preparing the
financial plan – With
the information provided in step 2 and step 3, the financial plan is developed
with addressing the objectives and goals set in step 1. The plan would include a
net worth statement or a balance sheet, tax to be paid annually, and the cash
flow statement after you are convinced of the plan than go on the final step. - Implementation and review of the
financial plan –
After the formulation of the final plan, then prepare an investment strategy. After
implementing these actions, they are to be reviewed from time to time and
modifications are to be made according to the market changes.
Features of a good financial plan
How do you evaluate the quality and effectiveness of your financial plan? Well, here’s a checklist you can use.
- Does it indicate your current
financial situation? - Does it list out all your goals in
measurable terms? - Does it lay out an investment
strategy?
If professional help is sought, your financial planner will ensure that your financial plan also contains the following:
- List of possible risks and a risk
management plan. - Expected returns from each
investment. - A mapping between the investments and
goals, i.e., how each investment helps you achieve your goals. - Details of one time and recurring
fees charged by him.
Recommendations
Personal finance management has become an essential part of one’s life. In tough times like COVID-19, this becomes even more important. Financial planning involves proper analysis, expertise, and discipline. Hence, one should start financial planning early as it will help in meeting financial goals and attain financial freedom, and if wanted can also appoint an advisor for better understanding and planning.