Every person has some aspirations and goals in life and to meet these, personal financial planning is important. This is because it helps lay a roadmap to achieve these goals effectively.
Let’s understand what financial planning is all about.
What is financial planning?
It is a flow or step-by-step process to plan one’s finances to achieve their financial goals. It is also known as financial management and it gives you a better picture of your income, investment, spending patterns, and savings. This planning helps you know where your money is going exactly, and then you can plan your expenditure and investments accordingly.
Importance of financial planning
Financial planning is important to know how much money you need to achieve your financial goals and how much you must save monthly to reach that target. There are various asset classes in which you can invest your savings to meet your financial goals faster.
Steps to improve personal financial planning
- Write your goals: Based on your aspirations, note down all the financial goals you want to achieve. These goals can be buying a house, buying a car, funding your children’s higher education and marriage, building a retirement corpus, etc.
- Define a timeline: The next step in financial management is to attach a timeline to each of your financial goals, for instance, buying a house after 10 years or higher education for children after 15 years. This will help you to know how much money you need and how long you have to amass it.
- Write your cash flows: This is the step wherein you write your total income (including salary, rental income, stocks and mutual fund returns, etc.) Now, list down all your fixed and variable expenses to arrive at the final savings amount. This step will give you a clear picture of your money inflow and outflow and then you can plan accordingly – where to reduce expenses, how much more to save to achieve your goals, etc.
- Know your risk appetite: Before investing your savings into an asset class, understand your risk-taking ability. An investor’s risk appetite is determined by several factors including their income, age, financial responsibilities and dependents, goals, etc. This is one of the most important steps in personal financial planning. This is what determines the asset allocation in your portfolio. This stage will let you know whether you should go for mutual fund investments, equity, or fixed-income securities and in what proportion. You can insult a financial advisor to help you with this.
- SMART goals: You now know how much money you need, how much you are saving, and how much and where you can invest. Go back to your goals and see which of them are achievable in the timeline you attached to them. Your goals should be SMART (Specific, Measurable, Achievable, Relevant, Time-Bound).
- Formulate a plan: Now comes the planning step. Formulate a plan to achieve each of the goals you have selected previously. Based on your monthly savings, risk appetite, and financial goals, decide which investments to make – mutual fund, gold, real estate, etc.
- Review the plan: Once you are done with formulating the plan, approach an expert to seek financial advice. A financial advisor will use their expertise to approve or suggest changes in your plan to make it more financially sound for you.
- Follow the budget: Make a budget of monthly expenditure and follow it wholeheartedly. Leave some room for some unforeseen expenses in that and be disciplined in sticking to the budget to have adequate savings for mutual fund investments or any other investments you have decided to make.
Financial planning is not a one-time thing. You will have to regularly review and modify it depending on changes in your goals, income, and other factors. But as time goes by, you will better understand what works for you and what doesn’t. Eventually, being disciplined and committed to financial planning will lead you to reap the benefits of meeting your goals and creating wealth.