What is Financial Planning?

It’s never too early to start planning for your financial future.

It sometimes happens that you suddenly find yourself cash-strapped, especially towards the end of the month and you start to wonder where all your hard-earned money has gone. If this happens, how will you ever manage to meet your life goals like buying a car or house, or ensure a safe and happy retired life?

This is why it is crucial we make the best use of every rupee we earn, and the best way to do this, is financial planning.

What is financial planning?

It is very simple—financial planning is all about taking stock of your income and planning your expenditure and investments. This is not just for your today, but also for your tomorrow. For example, if you earn Rs 50,000 every month today, you should use that money to plan for future goals like buying a car worth Rs 6 lakh.

Financial Planning is, thus, the process of properly managing your money and finances, so you are equipped to achieve your life’s goals.  Whether you want to plan for your child’s higher education, their marriage, your own retirement, a holiday abroad, or even a bigger house, you can find the most economical and practical way to do all of this through some careful financial planning. 

Related: Tips on Financial Planning and How to Begin

Where should you start?

The first step is to set your targets. Write down your goals; both short-term and long-term. Short-term goals could involve targets you want to achieve in a very short span of time, like going for a Europe tour or buying a bike worth Rs 1.5 lakh. Long-term goals could be buying a house in ten years or having a built up corpus of Rs 5 crore for your post-retirement life.

Related: Retirement Plans: Your 3 Step Guide

Decide goal deadlines and determine costs

It is important you quantify your goals. For example, simply saying you want to buy a house in 10 years is not enough. You need to set a numerical target, like Rs 50 lakh or Rs 1 crore. This will help you plan accordingly. Secondly, no goal can be achieved without setting a deadline. 5 years, 10 years, 40 years—any of these could be your deadline, but you cannot do without one.

For example, suppose you need Rs 5 lakh within the next 5 years, you could easily decide to set aside Rs 1 lakh every year to meet this target. If you did not have the 5-year deadline, how would you have planned your savings?

Also, make sure you consider inflation, which reduces the value of your money over time.

I have my goals set, what next?

Once you have a clear picture of your goals and the amount of money that will be required to achieve them, take stock of your current income and savings. This will give you a good starting point. For example, if you need Rs 5 lakh in the next 5 years, and you already have Rs 2 lakh saved, you only need to save the remaining Rs 3 lakh. Otherwise, you will have to plan to save the entire amount.

Plan your expenses and investments

Once you have set a target, you need to look at exactly how you will achieve it by chalking out a financial plan. This should include your expenditure – current and future; your savings – what portion of your income you set aside, and your investments.

For your investments, you need to get an idea about the risk you are willing to take and how much return you will need to meet your goals. If you are young, your risk potential is much higher than a person who is nearing retirement. Depending on your risk potential, you can invest your money into stocks, bonds, SIPs, real estate, FDs, or other financial products.

Set aside an emergency fund

A major aspect of financial planning is preparing for emergencies. Ensure that you set aside an emergency fund which will help you mitigate disaster in case of medical emergencies, job loss, accidents, etc. This amount should be separate from your other investments.

Monitor regularly

Financial planning is not a one-step process that you can finish in one step and be over and done with. It is an ongoing process. Just as your needs and aspirations in life keep changing and maturing over the years, financial planning too needs to be tweaked over time, so make sure you don’t lose track.