Importance of Personal Financial Planning

While one cannot predict the future, one should certainly be better prepared for it as all of us have our goals to be fulfilled at every stage of life and these goals will only be achieved if one has done the financial planning.

Financial planning is a systematic approach whereby the financial planner maximizes customer’s existing financial resources by using the appropriate financial planning tools and investment vehicles to best achieve his financial goals and objectives.

In other words, financial planning is the process of meeting once life goals through proper management of one’s finances.

Life goals can include buying a home, saving for children’s education, buying a car, protecting family against financial risks or planning for retirement.

According to Dhanil Balakrishnan, the need for financial planning services arises from the need of meeting the financial goals of one’s life  and it is financial planning that helps us to take a comprehensive look towards one’s futures financial needs and goals including cash flow, debt management, education funding, retirement planning, estate conservation and portfolio management.

It gives one the direction to make informed decisions about your investments so that one does not make any mistakes and they can reap the benefits of their financial planning for the rest of your life.

Benefits of Financial Planning Financial Planning ensures that the right amount of money is available in the right hands at the right point of time in future to achieve specific Financial Goals. Virtually anyone with moderate wealth or a decent income can avail the benefits of financial planning like:

1. Financial Planning is based on individual risk profiling, and it provides a road map to achieve financial goals
2. Financial Planning helps you take a ‘big picture’ look at your financial position and it guides you to examine your current financial status and determine objectives.
3. It helps in devising a strategy or plan for how you can meet your goals given your current situation and future plans. It also identifies weaknesses and recommends improvements.
4. It puts in place the risk management system to meet uncertainties of life through efficient Retirement Planning, Insurance Planning, Tax Planning and Estate planning.
5. Financial planning is the process of managing your money to achieve personal economic satisfaction. It allows you to control your financial situation and provides a feeling of security and less stress.
6. It is a disciplined approach to managing your finances to reach life goals. It involves systematic and disciplined investment mechanism, which helps in creating wealth over a period of time. It helps you to become more responsible towards disciplined investing.

Personal financial planning can be done in the following 5 steps:

Assessment: The financial condition of an individual can be gauged by formulating balance sheets and income statements. The personal balance sheet calculates the assets on the one hand and liabilities on the other. Assets include car, house, stocks, and bank account. Personal liabilities include credit card debt, bank loan, mortgage etc. Information regarding personal income and expenses is listed under the personal cash flow statement.

Goal setting: After having done a proper assessment of the financial situation, an individual can set up long term as well as short term goals.

Constructing a plan: Once the goals are set, appropriate strategies should be formulated in order to fulfill the goals. This could be achieved by curtailing unnecessary expenditure or by expanding the income level by investing in stocks, real estate or other interest earning assets.

Execution: For proper implementation of the financial plans individuals lack patience and perseverance and hence seek professional help from financial planners, investment advisors and lawyers. Monitoring and reassessment: The financial plan of an individual should be monitored from time to time for reevaluation.