Why Is It Important to Have Financial Planning?
Financial planning is a definite task of finding out an individual’s current pay and his future financial status by using current various parameters. A proper financial plan includes analysis and detailed review of those parameters to predict future income and withdrawal plans. There are various essential components for a financial plan like balance sheet, issues & problems, cash flow statement, income tax planning etc. A good financial plan must include details about your savings, investments, health insurance, risk management and many other elements of your financial life. Basically financial planning is categorized into 3 types:
- Short-term financial plan: it is prepared for a maximum span of 1 year.
- Medium-term financial plan: it is prepared for a period of one to five years.
- Long-term financial plan: it is prepared for a period of more than five years.
Rules/steps in Financial Planning
The financial planning process involves a logical sequence of procedures adopted to achieve the specified goal. It is a systematic and planned way which involves a series of steps to obtain the desired goals. Let’s discuss this one by one.
- Managing Current Resources: The 1st step emphasizes on determining your current financial status and how well money can be managed to satisfy future needs.
- Developing a Financial Goal: The 2nd step is to prepare a complete plan of managing resources or to make a decision towards saving some amount for future use. The only thing that can save you in a period of financial crisis is your savings. If it’s difficult, you can start your savings with a minimal amount.
- Maintaining a Balance Sheet: The 3rd step is you have to personally maintain a balance sheet of all your expenses in a notebook. If account transactions are being made frequently, then updating the passbook on a regular basis gives out a clear picture of your expenses.
- Identifying Alternatives: Alternatives play a major role for making sound financial decisions. When we go for a trip to a different place, we usually have backup plans with us. Just like that alternative plans must be there to utilize and save resources efficiently.
- Evaluation of Alternatives: The financial planning process needs to evaluate your potential course of action considering your personal values, economic condition and current scenario. If there are risks involved in it, there is a need to identify those risks and gather information and plan accordingly.
- Planning and Implementing Financial Plans: Every goal requires a definite plan of action. There are various ways to achieve a specific goal. To implement the financial plan effectively, identifying the best way out of several ways plays a key role to get success.
- Revision of Financial Plan: Reviewing your plans regularly helps you figure out the odds in it and helps in making priority based decisions. Personal factors won’t affect much if your back up plan is much stronger considering all future needs.
For a beginner who wants to do financial planning, he/she must try to make a plan on her own first or else he/she can take advice from a reliable source. Investing in mutual funds is a wise decision as it is paperless and easy to use. Although there are other investment options such as hedge funds, ETFs, and more, there is always a debate when it comes to hedge funds vs mutual funds. If we look at the current scenario, Due to this pandemic situation and outbreak of coronavirus, banks are heading towards privatization and interest rate is gradually reducing. The wisest decision would be investing in mutual funds and other companies that offer a better rate of interest than banks.