Financial Planning

Financial planning is the process of meeting life goals through a proper planning and management of your finances. Financial planning helps us to convert our dreams and aspirations in to reality. It also helps us to provide meaning and direction to our financial decisions.

Financial planning has to be done in a proper way, so that it can be implemented effectively.

It involves the process of assessing your financial situation, determining your objectives and formulating a plan to achieve them. The objective of financial planning is to ensure that the right amount of money is available in the right hands at the right point in the future to achieve an individual's life goals. It also allows you to understand how each financial decision you make affects other areas of your finances. There is difference between Financial Planning and Wealth Management. If you are wealthy, then Wealth Management will help you manage your wealth better, however if you are looking to create wealth, Financial Planning will help you achieve it faster and in a much systematic way.

Its always better to hire a financial planner, however now a days many free tools are available on Internet which will be able to guide you.

The important steps to be followed while planning our finances are

Analyse your dreams and aspirations

Establish the goals

Evaluate your financial status

Evaluate your emotional status

Develop a plan for achieving the goals

Implementing the plan

Monitoring the plan

Analyse your dreams and aspirations

All of us have got lot many things to do in life, Moreover we are all dreaming of doing the same at the earliest .But normally we do not realise the possibilities of these dreams. In India most of the people have not analysed these dreams and the ways of realising the same.

Establish the goals

Now you have to translate your dreams and aspirations in to money. Define the time frame within which you should be able to realize your dreams. The time frame may depend on your personal goals or family goals or both together. If you think, it is difficult to meet all your goals within the specified time frame, prioritize your goals based on urgency and importance. All goals need not necessarily relate to wealth accumulation only. There could be protection goals as well.

1. Analyze your financial status

2. Analyzing financial status includes,an inventory of assets and liabilities (including securities holding, debts, insurance, etc)

3. A description of the present arrangement for distribution of assets at death

4. Estimates of your income and expenditure

5. Details of your insurance coverage

Once you analyze all these relevant information of your own, you will come to know where you do stand and what your needs are.

A financial plan should include a review of your net worth, goals and objectives, investment portfolio, cash flow, investments, retirement planning, tax planning and insurance needs, as well as a plan for implementing your goals.

Analyze your emotional status

Emotional status is very important, while designing a financial plan for you. It will decide your strength to take risk or not. It will throws light on your hopes, fears, values, attitudes, preferences, biases and non-financial goals.

Develop a plan for achieving your goals

The plan, which you design, should take your present financial situation to the achievement of the objectives. A comprehensive financial plan should contain an analysis of all pertinent factors relating to your financial status.

There are different life stages for an investor and at each life stage his risk profile could be different. Risk profiling helps investor to find appropriate asset allocation strategy at different stage of life. Like fingerprints, investment profiles of people are always unique. Age, Life stage, income, savings, dependents and mindsets are factors that define a person's attitude towards investments. Risk taking ability and mental frame of mind plays a key role in determining where the investor ultimately puts his money.

The first step in asset allocation is `Risk Profiling'. Risk Profiling combines two key areas:

1) Estimating financial risk-taking capacity and

2) Understanding the (psychological) risk tolerance level of an individual.

A financial plan should include a review of your net worth, goals and objectives, investment portfolio, cash flow, investments, retirement planning, tax planning and insurance needs, as well as a plan for implementing your goals.

Components of a good financial plan

- your personal data

- your goals and objectives

- identification of issues and problems

- assumptions

- your balance sheet/net worth for the financial year

- cash flow management

- income tax planning

- risk management/insurance planning

- investments planning

- estate planning

A well drawn plan must be tailored to you specific goals, situation and circumstances. If additional expertise is required, you should consult with a specialist in that field to help you design the overall plan. There is more than one more way for your financial goals to be achieved. If you want to try with other ways, you can first analyze the advantages and disadvantages of each strategy. The plan should be specific. It should list what you have to do? When and with what resources?

The plan format should be such that you can easily understand and evaluate. Only once you decide that the plan well suits to your needs, you can go to the next step.

Implementing the plan

Merely designing a plan, no matter how sound, does not constitute financial planning. A financial plan is useful to you only if it is put in to action. You have to ensure that the implementation is carried out in the manner and in accordance with the plan designed.

Monitoring the plan and Asset Re-balancing

Periodic reviews are the best form of monitoring. Of course, you should keep flexibility for a review if circumstances warrant. Following are three aspects to look at in a review:-

- the performance of what has been implemented,

- changes in the personal and financial situation and objectives,

- changes in the environment (regulations, financial, economic)

If you are on track to meet your financial goals nothing else needs to be done. If that is not the case, a revision is necessary. Revision process will involve the same above discussed steps but will take lesser time.

Aspects of Financial Planning

Better understanding your present financial position

The questions contained in the Financial Questionnaire require you to list down your assets, liabilities, incomes and expenditures. This is a process of virtually drawing up your own Balance Sheet and will help you gain a better grip on your present financial position.

Cash Flow and Debt Management

Incomes and expenditures can be better matched through the Plan. It also will assist you in identifying whether your borrowings are within prudent limits.

Risk Management

You should identify your life and property insurance requirements. Evaluating your insurance needs is part of personal financial planning. Insurance usually takes care of your unpredictable needs and as these needs can arise at anytime, insurance is extremely important.

Achievement of Financial objectives

Various financial objectives, whether it is financing our child's education, a house of our own or our post-retirement phase can be better met through systematic investing. A properly laid out investment plan, prepared after considering your risk appetite, time horizons etc. go a long way in helping face the future more confidently.

Taxation

Often investors invest with the sole objective of saving tax. We believe that this is not the most desirable method. Investments should be in sync with your requirements, the tax angle being secondary. However, we do not ignore the tax aspect. Optimum Post tax returns are what all investors should be concerned about and that is what we too strive for. It is important that financial plans are tax efficient. The financial plan should help you in minimizing your tax liability and also maximizing your after-tax returns from your investments.

Inter-generational transfers

Estate planning is arranging for the transfer of your property to your heirs and to other beneficiaries, in a way that will, as much as possible, achieve your objectives. The most common vehicles for this purpose are the drafting of Wills and setting up of Trusts.

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