Financial Planning, a Tool to Achieve Goals

Do you know what does financial planning mean? What are the essentials of a financial planning? How can you use financial planning to achieve financial freedom?

In simple words, Financial planning is the long-term process of wisely managing your finances so you can achieve your goals and dreams, while at the same time negotiating the financial barriers that inevitably arise in every stage of life. Remember, financial planning is a process, not a product.

Our life is full of uncertainty and no one knows what the future holds. Whether it will be healthy or weak? So we need to do financial planning to achieve our financial goals and to have financial security in dire circumstances. One can’t achieve his or her future goals, no matter how healthy he or she is, if he or she will not plan for these goals. So one should plan now to have a stable future ahead. It often requires consideration of self-constraints in postponing some enjoyment today for the sake of the future.

Financial planning should be carefully budgeted. When you do your investment planning, you must budget for both big and small spends. Financial planning needs to account for expenses like rent, utilities, and food per month. Once you’ve taken steps to control your debt and spending and worked out what you’re aiming for, you’re ready to start thinking about a plan to achieve your goals.

Following are the six steps, which are involved, in financial planning

Take control: We all need to plan for the future. So we have to control our finances and plan for our future. But it’s really hard to know just where to start. The key things, which generally affect our finances, are what we earn, what we owe, what we’re spending and how much we’re saving. Moreover, goal setting is an essential part of taking control of our finances. If we set the goals then we have the direction – how else are we going to know what to aim for? Once we start thinking about what we want to achieve, we’re going to find that we have a mixture of short-term and longer-term goals. Long-term goals are hard to get to grips with because they can seem so, well, long term. While Short-term goals are rather easier to visualise – maybe you want to buy a new car, save up for a deposit on a house, build up some savings for a rainy day or pay off a loan.

Know yourself: Well, before launching into any financial decisions, we should know ourselves and should understand how we really feel about risk. Risk is simply the possibility, which something negative will happen and this so called risk plays a big part in our thinking about financial planning. The rule-of-thumb with investing money is the higher the return, the higher the risk.

Save little and often: “Save little and often” is the secret of a successful financial planner. Short-term saving is about funding goals, which we hope to achieve in; it may be in next five years. Different investments suit different people at different stages in their lives. So one should make investment after considering one’s risk appetite and liquidity requirement after prioritizing future goals. Different instruments with different maturity are available in the market where one can invest such as deposit accounts (saving a/c, fixed deposit, recurring deposit), equity, debt, property, commodities etc.

Invest for the future: Investment should be made with long term prospects. Balancing your investments is vitally important. Don’t put all your eggs in one basket – spread savings across pensions, your home and investments such as shares and bonds. Make sure that the investments you make in the portfolio contain products from diversified financial instruments with different liquidity. So one should build diversified portfolio by making investment in different financial instruments with different maturity or liquidity to achieve the goals.

Protect yourself: Don’t get so carried away with sorting out your future that you forget what might be just around the corner. Always shop around for insurance. If you’re a homeowner, you’ll need buildings insurance. If you have a car then you should go for a motor insurance.

Get advice: The sixth and final step brings on the financial advisers and looks at how to make the relationship work for you.

Instruments for Investment

Deposit Accounts: Deposit accounts may not carry any of the risks involved in bonds or shares but these do not mean they are risk-free. Real return – the amount of interest earned above inflation can be a very small margin; even there is always danger that inflation may erode returns and reduce the purchasing power. It offers less growth potential than other investments. These investments are ideal for short-term needs.

Debt Instrument: Debt is a special type of loan and is less risky than shares but not as secure as deposit accounts. Bonds pay regular income in the form of interest that can be reinvested for further growth. Gilt funds are default free funds and these funds stick to high quality-low risk debt, mainly government securities. Gilt funds differ from bond funds because bond funds invest in corporate bonds, government securities and money market instruments.

Shares (Stocks) / Commodities: Shares/ Commodities involve more risk than bonds and deposit accounts. Investors get return from investment in the shares in the form of capital appreciation, if the share price goes up and receives dividend if the company shares it profits with the shareholders. Investment in shares/commodities can give better return than investment in deposit accounts and bonds but there may be setbacks along the way.

Real Estate / Property: A lot of money is tied up in one asset. Mortgage and maintenance costs can be high. This investment can give good returns if the house prices rise significantly.

Conclusion

Making frequent investments into your savings plan is an important part of your overall financial plan. A financial plan is a road map to help you to achieve your life’s financial goals. The reality is that a great salary with income to spare does not guarantee financial success, nor does a modest salary necessarily prevent financial success. Financial planning isn’t something that happens by itself. It requires focus and discipline. Financial planning proves to be highly useful in effective canalization of your money. Proper financial planning provides one with absolute financial freedom.