There is no such ideal time for financial planning. However, as per the thumb rule, the earlier you plan, the better results you get. According to expert financial advisors, individuals should make proper financial planning just after earning.
Difference Between Financial Planning and Wealth Management
Often people get puzzled, believing both financial planning and wealth management to be the same. However, there are considerable differences between them. Financial planning refers to formulating a structured plan to manage your finances.
On the other hand, wealth management signifies the preservation and enhancement of wealth. Wealth management requires some wealth as a base wherein additional capital or investment returns will be gathered. To know about their differences, keep reading.
What Is Financial Planning?
What Is Wealth Management?
What Are the Differences Between Financial Planning and Wealth Management?
Following are the key differences between financial planning and wealth management:
Who Requires the Service
Financial planning is meant for middle and lower-middle-class individuals who require financial advice to meet their financial goals efficiently.
Affluent classes or individuals with high net worth mainly choose wealth management services.
Financial planning does not look at existing wealth and can be stated as goals-oriented financial management for individuals.
Wealth management focuses on existing wealth platforms to identify further investment and fund accumulation opportunities.
Active participation of specialised professionals is not required in financial planning. The advisor is just enough to perform the homework and address your financial concerns.
Wealth management is a complex area that extends beyond financial management. Here, the full-fledged participation of specialised professionals like chartered accountants, lawyers, etc., is essential.
Financial management encompasses cash-flow management, investment planning, tax planning, retirement planning, etc.
Wealth management assesses wealth and risk tolerance, wealth preservation, asset allocation, etc.
What Are the Important Components of Financial Planning?
The following are some essential components of financial planning:
- Cash Flow Planning: Cash flow planning aims to ensure that an individual has sufficient money and financial backing to achieve their future goals. Cash flow is classified into three categories: operating cash flow, financing cash flow and investing cash flow. Also, budget allocation and income analysis are crucial parts of cash flow planning. It enables an individual to balance their income and expenses sensibly.
- Investment Planning: Investment planning includes choosing different investment options for fulfilling financial and economic goals. Upright financial planning will give you a correct idea about the amount of money you are likely to invest. As a result, analysing risk and uncertainty, investment needs, and liquidity is necessary for a precise financial plan.
- Retirement Planning: Retirement planning is the process concerned with allocating your entire earnings for retirement. It enables you to cope with uncertainties and unpredicted expenses during your post-retirement phase. In other words, it ensures a stable flow of income even after you retire. Usually, as individuals start earning, they begin to plan for their future and retirement by estimating inflation and increasing the cost of living. If you find any problem regarding retirement planning, do take the help of experts and financial advisors.
- Insurance Planning: Choosing and purchasing an insurance policy sensibly is another essential component of a proper financial plan. Purchasing a life insurance policy is vital if you are the breadwinner of your family. This is because if any unfortunate incident happens to you, the insurance company will compensate the sum assured to your nominee. This way, your family will face no financial stress, even in your absence.
- Tax Planning: Tax planning is a vital component of financial planning that encompasses the practical usage of tax exemptions, deductions, and settlements to lessen the burden of tax liability and increase savings. To do tax planning efficiently, you should determine your financial situation from the perspective of tax efficiency.
- Estate Planning: The term 'estate' comprises your entire property, wealth, finances, etc. Estate planning is another significant component of financial planning, concerned with the passing down of assets, wealth, and finances from one generation to the next.
You must form a will and mention how much property you will pass on and to whom after you leave for your heavenly abode. In other words, estate planning helps in securing the future of your loved ones. Estate planning is also known as legacy planning.
What Are the Important Components of Wealth Management?
The key components of wealth management are as follows:
- Customised Solutions: Wealth management consultants provide you with personalised solutions fitting your needs. The services include investment management, estate planning, taxation, debt management, cash flow management, mortgaging, retirement planning, philanthropic activities, banking, and so on.
- Relationship Management: Relationship management focuses on three aspects: addressing your critical needs and meeting them by gathering and monitoring a squad of financial experts to help address your needs. Wealth managers must work with professionals like lawyers, chartered accountants, insurance advisors, etc.
- Investment Consulting: Investment consulting is one of the vital parts of wealth management. This requires a wealth manager to advise you on investment options, advice and planning. Its objective is to enable affluent clients to meet their financial goals.
- Advance Planning: Advance planning focuses on four primary financial needs beyond investment. It includes wealth building, wealth transfer, security of wealth, and philanthropy.
Now you have probably understood how financial planning and wealth management are different from each other. In a nutshell, it can be said that financial planning is a subset of wealth management and goal-oriented financial planning for commoners. On the other hand, wealth management is opportunity-oriented financial planning for affluent people.
FAQs about Financial Planning and Wealth Management
Yes, you can do your financial planning by taking assistance from professionals. You need to include cash flow planning, tax planning, investment planning, and retirement planning while making an upright financial plan.
Although a proficient wealth manager will make a customised portfolio based on risks, you still have to consider the uncertain nature of the market since they will never be completely invalid.
Following is the list of factors affecting financial planning:
- Social Welfare
- Financial Literacy
- Financial Inclusion
- Mastering Personal Finance
Other Important Guides About Wealth Management
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.