What is a financial plan?
The goal of a financial plan is to provide an overview of one’s current finances, set financial goals and evolve strategies to reach those goals. In addition to your cash flow, savings, debts, investments, insurance, etc., your financial planning should include the details about your financial life.
Benefits of financial planning
- Achieving financial goals
Everyone has financial goals. In the absence of a financial plan, although you may save money each month for these goals, the savings may be inaccurate.
- Be prepared for emergencies
Accidents, business losses or illnesses are not predictable. Without a stable financial standing, it can be difficult or even impossible to secure the necessary support. People might be forced to borrow money or take out loans.
See also: The importance of savings
- Improved financial understanding
Sudden opportunities may require you to come up with money fast, whether you are looking for an investment opportunity or to start your own business. Knowing where your money is invested, is the key to a smart financial plan.
- Improved standard of living
A financial plan can also help you grow your money if it is built and executed properly. You can invest your money in the right investment tools, with accurate financial planning.
- Financial security
People who are self-employed or own businesses do not have the financial security provided by a salary. Their monthly income is entirely dependent on their business earnings. In such a scenario, providing financial security to your family can get difficult at times.
Financial planning components |
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See also: Home loan eligibility calculator
Financial planning for beginners: Important rules
- Handle your finances
You need to show commitment to manage your money. Saving money is the first step toward money management and greater financial security.
- Regulate your expenses wisely
Chances are, you are living way beyond your means if you are living paycheck to paycheck and finding yourself struggling to make ends meet even before the month ends. You might not have enough money for the necessities, because of unplanned expenses.
- Keep a personal record of financial transactions
By understanding what you own and what you owe, a personal balance sheet is a powerful tool for taking your finances to the next level. It is a statement where you can list your assets and liabilities. The difference between your assets and liabilities represents your net worth.
- Judiciously handle the surplus cash
Your future depends on how you handle surplus cash. You are more likely to overspend, if you do not have a plan. Inflation means that everything is going to become more expensive as time passes. Without investing, your money will not grow, to bridge the inflation gap.
See also: Accrued income: What is it?
- Retirement planning
It is important for everyone to plan for retirement. Sedentary lifestyles make you more prone to diseases like diabetes, hypertension and heart attacks and the cost of healthcare is rising. In the absence of a social safety net, these expenses must be covered by one’s own funds.
- Debt management
If you do not manage your debts properly, you can lose part of your income. If you do not pay off your older loans, you may have to take out new loans. You may fall into a vicious debt trap if you let it get out of hand. There is a risk that critical life goals could be neglected and even your retirement could be delayed.
- Cover your risks
Insurance can protect you from loss of income that can put you and your dependents in financial jeopardy.
- Estate planning
It is your responsibility to decide what happens to your assets when the time comes, whether it is your car, your home, or the money in your current and savings accounts.
- Tax planning
It is very important for everyone to analyse their finances from a tax efficiency point of view. At the end of the financial year, you can claim various tax exemptions, deductions and benefits to reduce your tax bill.
See also: Income tax: Your complete guide to income tax laws in India
Financial planning services
If you are confused or unable to decide on the best financial plan for your needs, you can also take the services of specialist advisors. These financial advisors may charge a fee for their services. The financial planner will assist you in creating a plan after assessing you present financial status and knowing your goals and needs.
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