What will happen if you jump into unknown waters without appropriate safety gear? You will either sink or swim. However, the chances of the latter are pretty slim. On the other hand, if you're equipped with the right gear, you have a higher chance of swimming back to safety.
When navigating the different economic seas, smart financial planning does the same job as the safety gear. It keeps your finances on track and your goals within reach.
Let's understand how.
As you may have guessed, financial planning is the process of creating a plan to manage your finances better. With a proper financial plan, you can create a successful roadmap to achieve your life goals. Not to mention, you can bring greater clarity and direction to your financial choices.
For some, financial planning can mean planning for retirement using mutual funds or building a corpus for emergencies. For others, it can mean planning for loan repayment or taxes.
There are several types of financial planning, each serving a specific purpose to help individuals and businesses reach their financial goals. Here's a breakdown of the most common types:
Retirement Planning
Retirement planning helps you ensure you have enough income post-retirement by estimating future expenses, savings, and investments. This plan includes investing in various retirement plans such as mutual funds, PPF, insurance, NPS, etc.
Investment Planning
Investment planning involves managing your portfolio based on financial goals, risk tolerance, and timeline. It involves selecting suitable stocks, bonds, mutual funds, or other investment products to achieve short-term and long-term goals.
Tax Planning
Tax planning focuses on minimising tax liabilities through various tax-saving strategies. It involves using tax-efficient investments, maximising deductions, and deferring income when beneficial.
Estate Planning
Estate planning ensures assets are distributed according to your wishes after death, often involving wills, trusts, and other tools. It also aims to plan for any estate taxes you may be subject to.
Insurance Planning
This involves evaluating various types of insurance, such as health, life, disability, and long-term care, to protect against unforeseen risks and ensure financial security for you and your family.
Budgeting
Budgeting is the cornerstone of financial planning, requiring you to manage your income and expenses better. It involves creating a budget and sticking to it to meet your necessary and luxury expenses without debt.
Life is uncertain and full of surprises. But if you are financially prudent and prepared for rainy days, you can manage any challenge life throws at you.
Prudent asset allocation is another advantage of smart financial planning. Mutual funds, equity shares, etc., carry high risk. So, you need to monitor them regularly and see how they are performing. If they are not providing any value, you can always rebalance your portfolio.
Having a sound financial plan brings more discipline to your life. You learn to manage personal finances better and keep track of your spending habits. Thus, helping you save more.
Lastly, financial planning helps you navigate different stages of life with ease. You learn to manage the needs of today while preparing for the future.
See why financial planning is beneficial? Now, let's understand how to get started with it.
Additional Read: What is Goal-Based Financial Planning?
1. Frame goals
You can't score a goal if you don't know where the goalpost is, can you? To create a sound financial plan, therefore, start by defining your goals for future. It could be something as simple as investing in a mutual fund online. Or improving your salary structure to boost your purchasing power.
Whatever you decide, focus on optimising savings without compromising on your quality of life.
2. Create a budget
Next, budget your monthly earnings into fixed and living expenses, discretionary expenses, savings, and investments. This will give you a bird's eye view of your finances and help cut frivolous costs to improve savings.
3. Review plan periodically
Last but not least, remember: financial planning is always a work in progress. So, you need to revisit and revise your financial plan regularly.
Take stock of your investments and savings. Should you increase your monthly investment in SIP? Perhaps you should allocate more funds to debt funds? A quick review can help you sort out such changes and keep in step with the economic climate.
Additional Read: Best SIP for Long Term Financial Goals
Here are some quick tips to help you with your financial planning:
Bottom line
See how effective financial planning is? So, if you're eyeing long-term profits from your investment, start planning today.
Stay on top of all the latest mutual fund schemes with the Moneyfy app.
A financial plan helps individuals set, prioritise, and achieve financial goals. It gives you a proper roadmap for managing your income, investments, and savings for financial security.
A comprehensive financial plan addresses every aspect of your financial life. It includes budgeting, investments, insurance, retirement, estate, and tax planning, helping you meet short-term and long-term financial goals.
It is necessary to create a financial plan to manage your money effectively, ensuring you're saving, investing wisely, and preparing for future expenses or emergencies. It helps maintain financial stability and reach long-term financial goals.
Long-term financial planning focuses on goals in a longer tenure, typically five years or more. It can include financial goals such as retirement savings, buying a home, or funding a child's education.
Short-term financial planning addresses immediate financial goals, typically 1-3 years, such as building an emergency fund, managing day-to-day expenses, or saving for a vacation.
Financial planning in financial management involves aligning your financial resources with your short-term and long-term financial goals. It includes investment planning, goal setting, tax planning, and risk assessment to maximise your financial growth.
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28 October 2024
6 mins read
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