Originally published on 15.04.2017
WHAT IS FINANCIAL PLANNING PROCESS ?
What is Financial Planning ? The apt definition in the net is " Financial Planning is a comprehensive evaluation of an investor's current and future financial state by using known variables to predict cash flows , asset values and withdrawal plans " A complicated answer to a simple question . This is the problem with management schools. Instead of simple explanation , they complicate matters and give definitions which nobody understands .
Is financial planning essential ? The answer is a definite " Yes " . With nuclear family norm , sharing the cost of any emergency is out and one has to fend for himself or herself . We are aping the west,in making our Bharath an insurance hub . Slowly but steadily a time will come when " No insurance , no medical benefit " syndrome will hit us . Except for some countries like Norway or Sweden , old age care is a problem even in developed countries . It is not pleasant to see old people of 80 - plus working to make two ends meet and take care of their medical care .
What is the solution ? Simple - Financial Planning . Government employees , bank employees or defence personnel have the benefit of pensions taking care of their old age needs, but what about the majority of others ?
Most people want to handle their own finances since they get full personal satisfaction from that . Most people have some goal when they start financial planning . For some it may be purchase of a flat or car or holiday travel . To achieve this one requires a certain amount of planning . The process of managing money is called financial planning . Money in a bank that too in one's savings account makes the bank rich .
Every person , family or household has a unique financial position and any financial activity therefore must be carefully planned to meet specific needs and goals . A carefully made financial planning can reduce your old age anxiety . Money can buy most of the luxuries and help required at one's old age .
We all make hundreds of decisions each day . Some are simple and some of consequences . Some even complex with long term effects on our finances . The financial planning process is a longer six step procedure .
STEPS OF FINANCIAL PLANNING PROCESS
Step 1 : Determining the current financial situation : In this first step of financial planning process , you will determine your current financial situation with regard to income , savings , living expenses and debts . Preparing a list of current asset and debt balances and amounts spent for various items gives you a foundation for financial planning activities .
Step 2 : Fixing financial goals : You should periodically analyse your financial values and goals . This involves identifying how you feel about money and why you feel that way . The purpose of this analysis is to differentiate your needs from your wants . Specific financial goals are vital to financial planning . Others can suggest financial goals for you ; however , you must decide which goals to pursue . Your financial goals can range from spending all of your current income to developing an extensive savings and investment programme for future financial security .
Step 3 : Checking alternative courses of action : Developing alternatives is crucial for making good decisions . Creativity in decision making is vital to effective choices. Considering all of the possible alternatives will help you make more effective and satisfying decisions .
Step 4 : Evaluating alternatives : You have to evaluate possible courses of action , taking in to consideration your life situation , personal values , and current economic conditions .
Consequences of Choices : Every decision closes off alternatives . For example , a decision to invest in stock may mean you cannot take a vacation . A decision to go to school full time mean you cannot work full time . Opportunity cost is what you give up by making a choice .This cost , commonly referred to the trade-off of a decision , cannot be always be measured in terms of money .
Evaluating risk : Uncertainty is a part of every decision . Selecting a college and choosing a career field involves risk . What if you don't like working in this field or cannot obtain employment in it ?
Other decisions involve a very low degree of risk , such as putting the money ina savings account or purchasing items that cost only a few rupees . Your chances of losing something of great value are low in these situations .
In many financial decisions , identifying and evaluating risk is difficult . The best way to consider risk is to gather information based on your experience and experiences of others and to use financial planning information sources .
Step 5 : Creating and implementing a financial action plan : Relevant information is required at each stage of the decision making process . Changing personal , social and economic conditions will require you continually supplement and update your knowledge .
In this step of financial planning process , you develop an action plan . This requires choosing ways to achieve your goals . As you achieve your immediate or short-term goals , the goals next in priority will come in to focus .
To implement your financial action plan , you may need assistance from others . For example , you may use services of an insurance agent to purchase property insurance or services of an investment broker to purchase stocks , bonds or mutual funds .
Step 6 : Re-evaluate and revise your plan : Financial planning is a dynamic process that does not end when you take a particular action . You need to regularly assess your financial decisions .
Regularly reviewing this decision-making process will help you make priority adjustments that bring your finnancial goals and activities in line with your current life situation .
Is there a solution for someone who does not know how to invest ? . The answer is simple . It is the " SIP " , short for Systematic Investment Plan . One can start with Rs 500 . If an individual had invested Rs 5000 in a month in a SIP 20 years back , his investment would be of whopping Rs 2 crore now . not a bad return for an investment of Rs 12 lakhs . The power of compounding . This would be an eye opener for our youth earning handsome salaries but absolutely careless about their savings .
One has to just go to any hospital for a small ailment and what is the bill ? A cool Rs 30,000 or more for a minor ailment . So plan your finances , take an expert advice . In stock markets , only long term investors make money , traders do not . To give an example : The face value of a share of MRF was Rs 10 when it was listed . Now it is Rs 60,000 . Tempted ? There are hundreds of such shares which have made long term investors richer .
Another option , of course , is to purchase land as an investment . Purchase of gold is no more considered an investment option .
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No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a points of view of the author , and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments. Point of view expressed by the author is solely of the author and not of the website .
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