Financial planning is a step-by-step approach to meet one’s life
goals. A financial plan acts as a guide as you go through life’s
journey. Essentially, it helps you be in control of your income,
and investments such that you can manage your money and achieve your
If you take a closer look at the above examples, you’ll find that
there is one factor that connects all of them: money. You need to
have an adequate amount of money to fulfil your goals and desires.
More importantly, you need to have money at the right point in time.
For example, if you want to build up a corpus of Rs. 10 lakh for
your daughter’s college education through investments, you need to
grow this amount by the time she turns 18. Not a year later. This is
where financial planning becomes essential.
What are Benefits of financial planning?
There are numerous practical benefits to financial planning. It helps
Increase your savings It may be possible to
save money without having a financial plan. But it may not be
the most efficient way to go about it. When you create a
you get a good deal of insight into your income and expenses.
You can track and cut down your costs consciously. This
automatically increases your savings in the long run.
Enjoy a better standard of living Most
people assume that they would have to sacrifice their standard
of living if their monthly bills and EMI repayments are to be
the contrary, with a good financial plan, you would not need to
compromise your lifestyle. It is possible to achieve your goals
while living in relative comfort.
Be prepared for emergencies Creating an
emergency fund is a critical aspect of financial planning. Here,
you need to ensure that you have a fund that is equal to at
least 6 months
of your monthly salary. This way, you don’t have to worry about
procuring funds in case of a family emergency or a job loss. The
emergency fund can help you pay for varied expenses on time.
Attain peace of mind With adequate funds at
hand, you can cover your monthly expenses, invest for your
future goals and splurge a little for yourself and your family,
Financial planning helps you manage your money efficiently and
enjoy peace of mind. Don’t worry if you have not yet reached
this stage. If you are on the path of financial planning, the
of financial peace is not very far away.
Financial planning for life goals
The importance of personal financial planning in India cannot be
ignored. It is not just about increasing your savings and reducing
your expenses. Financial planning is a lot more than that. This
achieving your future goals, such as:
Wealth creation The rise in the price of
everyday items means that if you want to maintain or increase
your current standard of living in the future, you need to
create a sufficient
corpus of wealth. You may also want to purchase a better car or
a new house in the future. All this requires money, and it
merely highlights the importance of wealth creation. It is
possible to achieve
these goals by carefully investing your money in the right
avenues. Equity mutual funds can be a suitable option for long
term goals. These funds could help the investor to
in the long run.
Retirement planning Your retirement may be
25 or 30 years in the future. But that does not mean you plan
for it when you retire. To enjoy a happy and comfortable retired
need to start building your safety net right now. Planning at an
early stage in life can help secure your future against
financial uncertainties. Also, you invest lesser amounts if you
and gain from the power of compounding which helps to build a
large enough corpus over the 25-30 year period.
Child’s education Education has become very
expensive, not only in India but across the world. And in
future, this cost is only going to rise. This is why it is
necessary to start
planning from the moment your child is born. Calculate how much
you wish to earn and start investing in long-term investment
avenues that can help you achieve this goal. You can approach a
advisor for advice if you are not sure how to proceed further.
Saving tax Every year, you are probably
paying a substantial amount as tax. But you can now lower your
tax outgo legally. The Indian Income Tax Act provides various
people to reduce their tax outgo. By planning your taxes in
advance, you can identify the best avenues to invest your money
and reduce your taxable income. Mutual funds provide a tax
for investing for your life goals.
Why personal financial planning is crucial?
To tackle inflation
Remember the time you went to a multiplex with your family. You must
have probably heard your grandparents say: ‘Everything was so cheap
back then’. It’s true. Twenty years ago, the cost of movie tickets
was around Rs. 40, not Rs. 500 as it is today. Similarly,
chocolates, coffee, clothes, petrol and other regular goods were
much cheaper ‘back then’. This phenomenon of prices rising over the
known as inflation. It is the steady increase in the price of goods
and services over time. And if you are not careful, it can eat into
your savings in no time. Here’s a simple example to illustrate
Imagine a chocolate bar costs Rs. 10 today and you have Rs. 100. With
this amount, you can buy 10 chocolate bars. Over the next one year,
imagine you keep Rs. 100 in a bank that offers you an annual
rate of 5%. At the end of the year, you have Rs. 105 with you.
But over one year, let’s assume that the price of the chocolate bar
increases to Rs. 11. This means you have to pay Rs. 110 to purchase
the same 10 chocolate bars next year. But since you have only Rs.
you fall short of Rs. 5. This is how inflation eats into one’s
savings. It reduces purchasing power over time, and you have to pay
more money to buy the same goods.
You can combat inflation by investing in avenues that offer you
better returns over time. But for this, financial planning is
To create a contingency fund
The future is uncertain, and anything can happen at any time. Here’s
a scenario that highlights this point.
Imagine a father who has taken an education loan to finance his
daughter’s college education. At the same time, he is also saving
money to fund his retirement that is a couple of years away. But
a medical emergency occurs in the family. Unfortunately, the lack of
medical insurance coverage means he has to pay for medical expenses
out of his savings. This depletes his retirement corpus and
his financial burden.
Many people face such situations. And while it is good to hope for
the best, it is necessary to plan for the worst. A sudden job loss
or an unexpected medical emergency can shake up your finances
This is why you need to have an emergency fund to deal with such
issues. Financial experts advise investors to keep an amount equal
to 6 months’ salary as a contingency fund. This can be invested in
a liquid fund so that you can access the money quickly in case of an
To create a retirement corpus
medicines and more significant advances in the medical field mean
that people are now living longer retired lives. This is undoubtedly
thing. You can enjoy more time with your family, explore your
passions and dreams and travel around the world. But there’s one
crucial question you need to consider: how can I fund all these
You need to have an adequate amount of money to ensure you enjoy
your retired life to the fullest. This is possible by having a
financial plan that provides regular income post retirement.
To manage your money in the best possible manner
Satisfying the needs of your family members can be tricky. Your
teenage son may want to go to a space camp during the summer while
your oldest child is ready to go to college. In personal finance,
is vital. It not only helps you understand the needs of different
family members but also how you can achieve them. But for this, you
need to manage your money in the best possible manner.
For instance, parking your savings in a bank account is better than
spending all of it. However, this is not the best way to deploy your
money. In comparison, avenues like mutual funds could
provide better annual yields. So, when you identify your family’s
needs and make your money work actively to achieve them, you may
expect to see good results.
How to create a successful financial plan?
Understand your current financial situation Determine the status of your current finances, viz., your
income, expenses, debt, savings and investments. This is the
first step in financial
planning, as it gives you a good sense on the state of your
finances and ways to improve.
Write down your financial goals Ask
yourself: ‘what are the different financial goals I wish to
achieve in life?’ Write them on a piece of paper. Don’t hesitate
to put down any goal
because no goal is too small or too big. However, make sure that
your goals are specific. For instance, here are some achievable
goals: ‘I want to purchase an SUV worth Rs. 13 lakh in the next
months’ or ‘I want to buy an apartment worth Rs. 80 lakh in the
next 5 years.
Look at the different investment options There are numerous investment options available to
investors. In the mutual fund market alone, you can choose from
nearly 2,000 schemes.
Different investment avenues help investors to achieve different
goals. For example, equity funds are suitable for long-term
goals like retirement planning, child’s education, etc. If you
in relatively steady income and you are risk averse, you may
want to invest in debt mutual funds. Equity Linked Saving Scheme
(ELSS fund) are good to save tax. When it comes to investing,
experts have highlighted the importance of mutual funds.
Investing in these funds consistently over a longer period can
help you achieve your dreams and goals.
Implement the right plan You need to select
the right investment option based on factors such as your goals,
age, risk appetite and investment amount. If you are unsure on
you need to select for your portfolio, you can avail the
services of a financial advisor. These are certified
professionals who help investors make the right investment
choices. They also help with
other aspects like insurance, retirement planning, estate
planning and taxation.
Monitor your financial plan regularly The
financial planning process does not end once you invest your
money. You also need to monitor how the funds are performing
they don’t perform, you may need to replace them with better
performing funds. You also need to follow your plan because as
you grow older, your goals and dreams evolve. For instance, your
priorities may change after the birth of a child. Now, you need
to accommodate the expenses and objectives of a new member in
Benjamin Franklin has rightly said, “If you fail to plan, you are
planning to fail.” You may have several different financial goals
you wish to achieve but to reach them at the right point in life;
to have a financial plan in place at a very young age.