What is Financial Planning?

Published by Sharekhan Education | July 30, 2021

What is Financial Planning?

What exactly is Financial Planning? Is it investing your money in some investment or the other? Or is it keeping aside some amount of money for the future? Or is it just managing your resources resourcefully? Interestingly financial planning is much more than that. It isa process which involves many steps from planning to executing thoughtfully designed action plans to achieve financial success for a better tomorrow.

In simple terms, financial planning means taking a holistic view of your current financial situation; find out where you stand in monetary terms today and chalk out an appropriate action plan to propel you towards a brighter future. In short it helps you know yourself and manage your resources better.

With financial planning you need to cover a lot of ground before you can actually start investing; just like a plane that needs adequate momentum before it lifts off. To achieve financial success and meet your financial objectives you need to select investments that match your goals, time to achieve them and your risk tolerance. Random investing will not help you do so.

It is therefore important to:

1. Identify your risk tolerance i.e. know how much risk you can take so that you can invest accordingly and select the right asset class without losing sleep over it.

2. Know your investing style i.e. Active or Passive, to help you decide your next line of action.

3. Know your goals: the financial objectives you want to achieve.

4. Prioritize your goals so that you know which one is to be achieved first.

5. Take charge of your finances i.e. account for very rupee that you earn and spend. This will make you a better saver and investor in the interim.

6. Start collecting and analysing all relevant financial details; this will help you get a clearer picture of the path ahead, and will draw your attention to the gaps that needs to be bridged.

7. Develop an action plan i.e. put into place the right asset allocation (i.e. how much to put into equity and how much to put into debt) and adequately diversify your money across asset classes. You may use the thumb rule of 100 minus your age to determine the equity percentage of your portfolio; but as your goals are set differently on your timeline it would be wise to follow an objective based asset allocation instead.

Road ahead:

That is a lot of work done. Your financial plan has now picked up speed; buckle your seat belt, it is time to lift off. It is time to build your portfolio. Once you select investments that match your goals, time horizon to achieve them and your risk profile implement your action plan, lift off and embark on your financial journey.

Your flight has taken off, your journey has begun. You can take off that seat belt for now and ease yourself. But you are yet to reach your destination. The journey could be smooth as planned or you may have to face rough weather. Periodically review your plan, watch out for turbulence, and spot the red flags if any. Reviews help monitor performance of the various investments in your portfolio and changes in your personal or other situations that can disrupt your financial journey. Set up review schedules aligned to the nature of your portfolio. An aggressive portfolio may require more frequent reviews while an annual review may be doable for a conservative one.

Next what you ask?

Well if the weather is fine, you will smoothly reach your destination but if not you need to take corrective actions like putting on the seat belt or correcting the course, etc… if needed. Reviews help spot the red-flags while rebalancing will help take corrective actions; doing away with non-performing assets, realigning the asset mix etc.

So all this and more is Financial Planning. Securing the financial future of your dependents in your absence, maintaining adequate emergency resources and ensuring a smooth transfer of your assets to your loved ones are also within the ambit of financial planning. Do you remember that investing in a particular investment or keeping aside money for the future or working towards a goal are just small pieces of the big picture. In order to achieve financial success you need to take control of your finances and be disciplined enough to stay the course.

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Happy Reading!!