What is Financial Planning: How to Make a Good Financial Plan

Financial planning is a roadmap to reaching your financial goals of saving for emergencies, retirement, children’s education, buying a house, travelling, starting your own business, etc. But, if your monthly spending is high compared to the amount you save or invest, you need to revisit your financial plan. 

This article helps you get a basic understanding of financial planning  and guides you through the steps to make a better financial plan. Keep reading!

What Is Financial Planning?

Financial planning is a step by step process to achieve long-term and short-term financial goals. It helps improve your financial situation comprehensively by forming a structured financial map. Financial development in an organisation computes the estimated capital in order to determine the level of competition. In addition, the procedure aims at creating financial rules and guidelines in the areas of taxes, savings, finance, insurance and administration of the organisation. 

What are the Objectives of Financial Planning?

There are several objectives, considering which one should go ahead with financial planning:

• Determining capital structure
• Determining capital requirements 
• To ensure maximum usage of financial resources for getting sufficient investment returns. 
• Framing financial policies regarding cash control, lending, borrowings, etc.

Why is Financial Planning Important? 

• Financial planning aims to form an organisation’s policies, guidelines, objectives, and budgets in a structured way to better financial activities. The importance is discussed below:
• It helps an enterprise to determine how much money to spend, when and where to spend it.
• Proper financial planning will control the income, expenditure and investments in such an upright way that it can maintain the flow of money in the business. 
• Financial planning forms the balance between inflow and outflow of funds to maintain stability.
• Financial planning improves the company’s production, growth, and expansion by ensuring its longevity. 
• An effective financial plan diminishes unevenness and uncertainties inside the organisation. 
• An upright financial plan stays in touch with the changing marketing trends to make it easier for the organisation to cope with the situation. 
• It enhances the stability and profitability of the organisation by a quite large margin. 

What are the Types of Financial Planning?

Financial planning is classified into various types. They are as follows:

• Cash Flow Planning
• Insurance Planning
• Financial Planning
• Retirement Planning
• Investment Planning
• Tax Planning
• Real Estate Planning

Also Read: Financial Planning For Women: How To Get Started In 8 Steps

Benefits of Financial Planning

Saving and Investing

Making a well-scheduled financial plan and following the same will enrich your organisation structure and expand. Saving and investing as per the financial plan will ensure your company’s long-term survival. On the other hand, forming a proper association with investment is one of the most vital factors of a sound financial plan.

Everyone dreams of purchasing a new home, children’s education, marriage, etc. This family bond will encourage you to stick more to your financial plan. 

Reduces Debt

Too much debt can form a massive burden on your savings, affecting your long-term financial security. But when you make an upright financial plan and walk along with its guidelines, you will be able to spend the money for improving your home, buying a new car etc., from your investments and at the same time lessen the debt. Further, according to section 80C having a sound investment plan can help you save on taxes. 

Risk Diversification

Allocation of assets and diversification of risk are crucial constituents of a financial plan. If you are not following any financial plan, you can get large returns by investing in assets. In addition, protecting financial goals from the complications of the capital market is a vital benefit of financial planning. 

Improve Lifestyle 

Nowadays, numerous investors are fulfilling their daily needs via loans, credit cards etc. as a result, the household debt in India is enhancing. Debt funded lifestyle improvements may not be sustainable. Often some people make too hefty decisions by spending a large amount of their savings on their children. In turn, this causes a real problem in their afterwards life. Hence, if you make a proper financial plan about investing money and follow the same, you can improve your lifestyle in a practical way. 

Optimal Use of Resources

Financial resources are too vital while running an organisation. You can form a scheduled strategy via a financial plan. This will help you allocate your resources, using your money more sensibly, thereby optimising the resources. 

How to Make a Financial Plan? 

Making a financial plan will always secure your future. So it is advisable to systemically frame the plan. Here are five important steps to consider while forming your plan: 

Step 1: Determine your financial goals and objectives

Step 2: Assemble your personal and financial information

Step 3: Analyse your personal and financial information accordingly

Step 4: Presentation and development of the financial plan

Step 5: Review and execution of the financial plan

Also Read: Top 5 Personal Finance Trends In India To Watch Out For In 2022

Financial Planning Tips

Budgeting

The foremost step while framing a financial plan is budgeting. It is because you will have no idea where your money will go. Hence form a budget even if your organisation makes a big turnover at the end of the year. 

Make Payments of Credit Card

The debt that occurred due to credit cards is a big factor that causes harm to your financial status. So make sure that you pay your credit card bills timely in order to avoid the debt burden. Try not to exceed 50% of the credit card amount if possible. 

Keep Good Records

Make sure that you keep records of every large transaction you make. If you are not carefully claiming your allowable income tax deductions, focus on doing it immediately. It is because this can result in your financial downfall sooner or later.

Maintain Proper Savings

Make sure that you keep a large sum of money as savings and avoid wasting money from it lavishly. It is because, during any financial crisis or family emergency, you can clear it out of your own savings without going for personal loans or credit cards. 

Final Word

From the article, we have discussed how important financial planning has been. So, if you are leading your life without thinking of an effective financial plan, stop doing so. Instead, take guidance from expert financial advisors and frame proper planning. Lastly, remember that a financial plan is useless if it is only written on paper and not followed. 

FAQs on Financial Planning