The three major financial planning components are Budgeting, Liquidity Management, and Insurance.
Financial Planning Vs Investment Planning
While mapping out your financial future based on your short-term and long-term goals, you might have heard of a lot of plans and strategies. Some of them even confuse you, like financial and investment planning.
Though these two terms often look synonymous, there are a lot of differences between the two. They have unique characteristics that distinguish one from another. Read on to learn more about what is financial planning vs investment planning!
What Is Financial Planning?
Financial planning is evaluating your client’s present financial condition and summary of their goals. It is a roadmap that helps individuals get from their present condition to the future financial status they want.
A thorough financial plan helps address the client’s investments, current savings, real estate planning, budgeting, taxes, and retirement. While mapping out a financial plan, a financial planner considers the following things: your future income needs, future asset purchases, and almost anything that impacts your economic life to ensure you keep you on track for achieving your financial goals.
What Is Investment Planning?
Between financial and investment planning, the latter is a comprehensive investment strategy that helps in maximising your returns to help meet your long-term and short-term goals. These are typically designed by considering your diversification, asset allocation, and risk tolerance. Based on these factors, it assists you in deciding how much to invest in bonds, stocks, and real estate to maximise the returns.
It requires no roadmap. Also, an investment planner will help you to stay calm during a time of high market volatility.
What Is the Difference Between Financial Planning and Investment Planning?
While discussing investment and financial planning, let’s look at some of the crucial parameters on the basis of which these both are differentiated.
Area of Focus
It has a broader framework and requires details like how to plan for short-term and long-term goals, how much funds are required at the time of retirement, etc.
It is the pathway to your financial planning, thus involving detailing what should be your asset returns, diversification, etc.
As it involves a more long-term perspective, it plans your retirement and child’s future education, etc.
It has a shorter and smarter perspective and involves information like how equity funds, and debt funds will perform in the next few years.
It helps in reducing your overall debt by focusing on products that minimise your risk, like health insurance, asset insurance, etc.
It focuses more on asset classes like debt, equity, gold, etc. Thus, it tweaks your assets in a way to help predictably meet your financial goals.
It does not require regular monitoring. Once made, its sanctity remains constant for years.
It needs to be reviewed constantly, at least once a year and accordingly, changes are updated.
Rebalancing is only required when your financial situation undergoes a major change or when there is a major structural change in the asset class returns.
Rebalancing is required under various conditions like a shift in asset values, the underperformance of an asset class, etc.
It is unique for an individual and cannot be replicated for anyone else.
It can be quantified, and there will be a fine set of possibilities for other individuals.
It is more detailed and static in nature.
These are subjected to market risks, thus, highly volatile in nature.
How Financial Planning Works?
Financial planning is essential because it helps make the most of your assets and protects you and your family from financial setbacks. A financial plan that works involves the following steps:
Step 1: You need to discuss your financial objectives and goals with your financial advisor. They will assist you by providing a roadmap for your financial future as per your requirements.
Step 2: They will gather all your relevant rate a report that states your current financial profile. Also, they will pinpoint the areas of your strengths and weaknesses through solvency ratio, savings ratio, liquidity rate and financial information, including your assets, liabilities, incomes, expenditures, risk tolerance capability, etc.
Step 3: They will review the information you have provided, genio, etc.
Step 4: They will develop and present your financial plan based on the information provided above. It will include your annual consolidated tax calculation, net worth statement, annual cash flow report, etc.
Step 5: After reviewing the financial plan, your financial advisor will recommend some courses of action, like implementing any investment strategy, making some income and expenditure adjustments, etc.
Thus, financial planning helps you feel more confident in times of recession, inflation, etc.
How Does Investment Planning Work?
Preparing an investment plan involves a lot of research. It involves the following steps:
Step 1: Define your current financial situation to your investment advisor and let them make a budget based on how much you are willing to invest, your emergency savings, income after expenses, etc.
Step 2: Define your financial goals and an estimated timeline, like how much growth you expect from investing a certain amount over time.
Step 3: Your advisor will determine your risk tolerance, i.e. how much risk you are willing to take for potential growth. Also, you need to discuss your time horizon with them, like when you could pull your investment for your ultimate financial goal.
Step 4: Consider where you want to invest. Based on your financial portfolio, your advisor will suggest to you the best place to invest, whether in bonds, stocks, or any other physical terms.
Step 5: Finally, your investment advisor will monitor how your investments perform and rebalance them as and when required to reach your goals sooner.
Thus, between financial and investment planning, the former provides you with a panoramic view of your finances, while the latter is the core component of the former.
Therefore, effective planning will help you achieve financial freedom while tackling many twists and turns that come your way!
FAQs about Financial and Investment Planning
Financial planners focus on real estate planning, retirement planning, and more, while investment advisors focus on helping you make investments. So, whether you want to grow your wealth or invest in mutual funds or stocks, you can always consider working with a financial advisor.
The investment decision is completely independent of the financing decision. But the financing decision somehow depends upon your investment decision.
Other Important Guides About Wealth Management
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