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Make Yourself Aware of What Financial Planning is?

financial planning — (Source: yourarticlelibrary)

A comprehensive plan that includes a person’s current financial situation and long-term objectives, along with strategies to achieve them, is a financial plan. Every individual maintains this plan on their own or with the help of a financial planner. Further, knowing in-depth about this will help an individual to choose the best financial plan.

In this article, we will discuss everything about a financial plan and why it is important to make such a plan.

Stick around to know more!

Financial Planning Definition

Financial planning is a step-by-step approach to estimating the required capital and determining how to acquire the same. Simply put, it helps you keep track of your income, expenses, and investments so that you can manage your finances better. While making a financial plan, you should consider your current monetary condition and your future expectations.

Further, to understand the meaning of financial planning, one should not focus on a single aspect of his/her finances. It is a holistic approach that encompasses a number of services.

Let us delve into the importance of financial planning in the following section.

Why is Financial Planning Important?

A financial plan essentially includes strategies and policies that will end up increasing your finances in the future. However, for several investors, the importance of a financial plan might not be clear. Therefore, before jumping into the financial planning steps, it is advisable to go through the following points:

It ensures adequate funds.
Financial planning maintains stability by balancing the inflow and outflow of funds.
It also ensures a fund supplier’s convenience in investing in companies that practice financial planning.
Companies exercising financial planning can help in its growth and expansion, thereby promising a long-run survival.
With a financial plan, you can curtail any uncertainties due to changing market trends. This happens because of the abundant funds. Also, one can avoid unforeseen situations that can become a hindrance to the company’s growth.

Now that you know the importance of having a financial plan, let’s look at some of its objectives.

Financial Planning Objectives

Before looking into the objectives of financial planning, it’s important to know its goals. Financial management specifically has two main goals. They are as follows:

Profit maximization.
Maximum wealth generation for a shareholder.

Achieving these financial planning goals becomes easier if you are clear on its objectives. Few objectives of a financial plan are:

Finding out Capital Requirements: Capital requirements depend on some factors like current and fixed assets’ costs, promotional expenses and long-range planning. Also, it is crucial to consider both short and long-term requirements.
Determining Capital Structure: The proportion of capital necessary in a business is its capital structure. This structure includes debt-equity ratio decisions for both short-term and long-term.
Framing Financial Policies: Financial policies concerning cash control, borrowings, lending, etc., are framed in a financial plan.
Resource Utilisation: An important component of financial planning is utilising scarce resources in order to obtain maximum returns on investments with low costs.

After learning about the goals and objectives of financial management, understanding the advantages of financial planning will become easier.

Benefits of Financial Planning

There are several practical benefits of chalking out a financial plan. They are as follows:

Boost Your Savings

As already mentioned, a financial plan gives you an insight into your income and expenses. By doing so, you will be able to frame a concrete plan that will allow you to save more. With monetary planning, cut down your expenses, which will automatically boost your savings in the long run.

Better Standard of Living

Managing funds without compromising on the standard of living is the ultimate goal of every investor. Therefore, having a good financial plan under your sleeves will help you pay monthly bills, EMI repayments and other expenses while living in relative comfort.

Preparing for Emergencies

Preparing an emergency fund is an important aspect of financial planning. This fund will help you to procure funds in case of a family crisis or job loss. Therefore, financial planning is a good way to be prepared for any unforeseen situation.

Furthermore, it is vital to know the financial planning process. In the following section, you will find details regarding the same.

Steps of the Financial Planning Process

If you are wondering how to do financial planning, the following steps will help you create one:

1. Understanding the Current Financial Situation

The first step in financial planning is determining your income, expenses, savings, debts and investments. Upon finding this, you can pinpoint the ways in which you can improve your finances.

2. Chalking out a Financial Goal

Next, you are advised to pen down your financial goals. The goals should be specific. Knowing your current financial situation will help in forming goals that become easier to achieve.

3. Considering Different Investment Options

Investors have a plethora of options available in the current market. Choosing an investment option that generates more returns is their ultimate goal. However, determining the correct investment tool can become difficult if you do not consider factors like your risk-taking capability, current finances, investment purpose, etc.

Therefore, evaluating these factors will help you to choose an appropriate investment instrument.

4. Making a Sound Financial Plan

After selecting an investment option, you need to chalk out a financial plan that improves your financial condition in the long run. For that purpose, you might seek help from a financial advisor if you are unsure about your plan. They will make the right choices considering your current finances and future requirements.

5. Monitoring a Financial Plan Regularly

The process of financial planning does not end with investing in the right instruments. You need to monitor how your funds are performing regularly. Also, you should consider the probability of changes in case of events like the birth of a child, sudden death of a family member, etc. However, following a financial plan is advisable as it can help achieve goals.

Now that you know the financial planning procedure, you can plan according to your needs.

Broadly speaking, there are two types of financial planning one should know about. They are short-term and long-term financial planning. Let’s understand these two financial plans in the following section.

Short-term Financial Plan

Financial planning is about highlighting problem areas and solving them by developing strategies. When these strategies lead to results within a year, it is known as a short-term financial plan.

Further, this planning helps corporations to increase their daily supplies, inventory orders and payrolls. Some examples of financial instruments that offer short-term planning are commercial paper, promissory notes, repurchase agreements, letters of credit, etc.

Long-term Financial Plan

This type of financial planning combines financial forecasting with strategizing. It is a process in which the projection of revenues and expenditures takes place over a long-term period. This process depends on various variables like economic conditions, future expenses and more.

Furthermore, this financial planning is necessary for cash flow enhancement, research and development, company expansion and more.

Therefore, it is apparent from the aforementioned points that financial planning is a convenient way to increase your finances.

Frequently Asked Questions

✓ Are tax issues addressed in a financial plan?

Financial planners help clients with their tax issues. They will help you with options that will allow you to maximise your tax refunds and minimise tax liability.

✓ Is financial planning similar to asset management?

No, asset management refers to managing assets for a client. In asset management, a client will have an idea regarding his investment options. Financial planning is a holistic approach to manage finances.

✓ What are the factors considered in a financial plan?

There are several strategies included in a financial plan. They are retirement plans, comprehensive risk management plans, long-term investment plans, tax reduction strategies, and estate planning.

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Disclaimer: This information is added only for informative purposes and collected from different sources across the Internet. Digit Insurance is not promoting or recommending anything here. Please verify the information before making any decisions.

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