What is Financial Planning: How to Make a Good Financial Plan
6 June 2022
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:
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.
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.
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.
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
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.
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
Q1. What to do while going for an effective financial plan?
Ans: Try to avoid taking a whimsical decision if you have no such idea about financial plans. Under such circumstances, you can grant help from skilled financial advisors who can offer you their best possible support.
Q2. What are the principles of financial planning?
Ans: There are four principles of financial plans. They are: – Consider long-term investing and goals – Spend less than you earn – Uphold liquidity – Reduce using debt
Q3. What is the most vital step of financial plans?
Ans: The most important step of a financial plan is to create a sound plan and observe your financial progress. Also, maintain day to day communication and verify the financial updates as much as possible.
Q4. What is Budget planning?
Ans: The process which is concerned with forming a budget and applying it to the business operations is called budget planning or budgetary planning.
Q5. What are the financial decisions?
Ans: There are three types of decisions that financial managers take. They are: – Dividend Decision – Financing Decision – Investment Decision
Before you go…
Looking for instant 🚀 personal loans 24*7 anywhere, anytime? Get personal loans up to ₹20 lakh starting at 9.9% p.a. Install the Navi app now!
Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
We are a diverse group of writers, editors and Subject Matter Experts striving to bring the most accurate, authentic and trustworthy finance and finance-related information to our readers. Our mission is to simplify jargon and industry lingo. We believe sharing knowledge through relatable content is a powerful medium to empower, guide and shape the mindset of a billion people of this country.
What is Diversify Investment Portfolio – Top 5 Ways in 2023
If you want to start investing, diversifying your investment portfolio is important.
There are d...Read More »
Copy Trading: Strategy, Risks, Benefits and How to do Copy Trading?
Copy trading is a way to automate your investments that involves copying the trades of other trader...Read More »
What is Money Management – Its Tips and Why is it Important?
Money management is managing your wealth or finances in ways that keep your finances flexible and y...Read More »
Top 5 Wealth Management Tips That You Should Consider in 2023
If you have already started saving money, then probably it’s time to grow your wealth. What’s t...Read More »
EPF Interest Rate In 2023: How To Calculate Interest On EPF Contribution
Employee Provident Fund or EPF has been popular among salaried individuals for a long time now. It ...Read More »
7 Ways To Become A Smart Investor In 2023
Investing wisely is the key to constant wealth creation. A lot of elements are essential in the ent...Read More »
6 Tips you can Consider to Save Money in 2023
It’s 2023 and our financial experiences have changed a lot in comparison to, let’s say a decade...Read More »
5 Best Money Making Habits That Can Make You Wealthier in 2023
Almost everybody seeks to become wealthy, but only a few achieve that goal. Because becoming wealth...Read More »
Wholly-Owned Subsidiary – Definition and Features Explained
You must have heard about larger companies acquiring smaller companies for business expansion. When...Read More »
Profitability Ratios – Types, Importance and Calculation
Investors use profitability ratios to assess a company's capacity to earn profits in comparison to ...Read More »
How Implementing Economic Order Quantity (EOQ) Could Drive Effective Inventory Management
Economic Order Quantity (EOQ) is a metric that helps determine the optimal order quantity a busines...Read More »
Stock Appreciation Right – Types, Examples and How do they work?
Companies adopt several methods to incentivise or retain their employees. One of the most common me...Read More »
Diwali 2022: Diwali Holidays – The Festival of Lights
The ‘Festival of Lights’ is one of the biggest and most anticipated festivals in India. This is...Read More »
Best Index Funds – Top 20 Index Funds in India
Index funds replicate the performance of a stock market index, such as the Sensex or Nifty 50 to ge...Read More »