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We spend our lives trying to find a balance between our expenses and savings. Understandably, it can be challenging to fulfil significant life goals within a limited income. The financial planning process helps you map the priorities, which give a structure to these expenses and savings.
More About Financial Planning Process
The objective of financial planning process is to give personal satisfaction of security. It gives you the time to reflect on investment choices and review their benefits to your particular profile. More importantly, financial planning process gives you a sense of control over your life, which is crucial to living a peaceful and happy life.
The steps in financial planning help you organize life goals for the future years of your life. It reduces the impact of uncertainties on your future and enables you to feel secure in the face of difficulties. You can enhance the quality of your life by taking up strategic financial planning in several ways.
Some of the substantial benefits of following the right financial planning process include effectively obtaining and protecting your financial resources. When you do not have a sound financial plan, there are higher chances of incurring excessive debts. Hence, it is crucial to understand the steps in financial planning and put them to use.
Financial Planning Steps
You make several decisions each day of your life. Some of them may bear a significant and long-term consequence in your life. You can identify the needs/gaps and establish a direction for future investments by following the steps in financial planning.
The financial planning process gives you a broader perspective on these decisions and enables more productive investment choices. Unfortunately, not everyone knows about or consider the importance of financial planning process in life. The increasing range and complexity of investment products also make it difficult for an average person to keep up with them.
Therefore, it is important to have a structure to your approach when it comes to major life decisions. Here are the steps in the financial planning process discussed in detail:
1. Financial Situation Analysis
Firstly, it is essential to be aware of your financial situation. It includes evaluating the current finances such as income, regular expenses, savings, debts, and such. These steps in financial planning are to recognize your requirements based on your lifestyle and responsibilities.
You can create a list of the current assets and debts to get a better picture of where you stand in economic terms. It will help set up the foundation as the next steps in the financial planning process will be in accordance with these factors. It serves as a starting point and brings your economic situation to a more transparent viewpoint.
Even if you think that your life is relatively similar to your peers, there are distinct elements that affect your financial plan. For instance, the amount of insurance coverage that you may require depends on the number of financial dependents and their life goals.
It helps to calculate term insurance premium & adequate amount that will be enough to accommodate them.
You can create a list of the current assets and debts to get a better picture of where you stand in economic terms. It will help set up the foundation as the next steps in the financial planning process will be in accordance with these factors. It serves as a starting point and brings your economic situation to a more transparent viewpoint.
Even if you think that your life is relatively similar to your peers, there are distinct elements that affect your financial plan. For instance, the amount of insurance coverage that you may require depends on the number of financial dependents and their life goals.
It helps to calculate term insurance premium & adequate amount that will be enough to accommodate them.
2. Goal Setting
Each person has a different set of long and short-term goals in life. Most people wish to buy a car, a house and make travel plans for the future. If you handle several responsibilities being the only breadwinner in the family, it includes looking after your family's present and future needs.
The goals and objectives of your life serve as a guide for the financial planning process.
As a thumb rule, you must make them quantifiable, clear, and within a specific timeframe when you are setting the goals as part of strategic financial planning. The purpose of this step in financial planning is to prioritize and separate your needs from your wants.
Furthermore, it is also important to review the goals in your financial planning process periodically. Since your life is continuously going through several changes, it is best to modify and introduce the necessary changes from time to time.
3. Financial Plan Creation
After successfully compiling the required information for your financial planning process, you can move on to the next step. It involves making an action plan to fulfil the goals in a specific timeframe. For this, you will have to assess the financial instruments that are best suited for your profile.
There is a wide variety of investment products available in the market today. It is up to you to decide which of them fits well with the previous two steps of financial planning. Depending on factors such as budget and risk appetite, you can create a diverse investment portfolio.
3. Financial Plan Creation
After successfully compiling the required information for your financial planning process, you can move on to the next step. It involves making an action plan to fulfil the goals in a specific timeframe. For this, you will have to assess the financial instruments that are best suited for your profile.
There is a wide variety of investment products available in the market today. It is up to you to decide which of them fits well with the previous two steps of financial planning. Depending on factors such as budget and risk appetite, you can create a diverse investment portfolio.
Also Read: Types of Investments
It can be challenging to comprehend the features of different investment tools and their applicability to your financial situation. At this stage of the financial planning process, you may feel the need for assistance. For instance, you can ask for help from an insurance agent if you plan to buy an insurance product. As an investor, you should feel comfortable with your choices for the benefit of your family members.
4. Review of Financial Plan
Financial planning process is dynamic. It requires frequent reviewing. By the time you reach the point of finalization, certain factors in your life might have changed. Hence, before implementing the plan, it is essential to analyse the benefits to make sure they meet your demands appropriately.
Moreover, it is always preferable to be safe than sorry when it comes to matters of money. This step in financial planning gives you a fresh look at your decisions, which can make a considerable difference. Before investing your hard-earned money, make sure that your goals and actions are aligned with each other.
5. Implementation
The final step in the financial planning process is to implement the decisions mentioned earlier. As simple as it may sound, it can actually be the most difficult step in financial planning. You may begin to worry about your expectations and the ability of the investments to fulfil them. However, there is a reason why the financial planning process is regarded as a crucial one in life.
You must remember that you are on the right track if you follow the key rules of strategic financial planning. Going through the entire financial planning process puts you in a better place of judgment. Life is full of uncertainties, but implementing the plan gives you a sense of security in the face of a crisis.
5. Implementation
The final step in the financial planning process is to implement the decisions mentioned earlier. As simple as it may sound, it can actually be the most difficult step in financial planning. You may begin to worry about your expectations and the ability of the investments to fulfil them. However, there is a reason why the financial planning process is regarded as a crucial one in life.
You must remember that you are on the right track if you follow the key rules of strategic financial planning. Going through the entire financial planning process puts you in a better place of judgment. Life is full of uncertainties, but implementing the plan gives you a sense of security in the face of a crisis.
When you put it into action, you safeguard your family and yourself against unforeseen circumstances. Having control over your finances is incredibly vital to ensure the fulfilment of long-term expectations. A calculated move in the right direction at the right time may be all you need to achieve your dreams in life.
Frequently Asked Questions (FAQs)
Q. What is the Right Time or Life-Stage to Start Financial Planning?
A. The right time for making investment decisions depends on personal factors such as the current life stage, nature of income source, lifestyle, and financial dependents. However, in general, when you begin earning, it is preferable to start reviewing your financial situation and make decisions accordingly.
Q. How should I choose Investment Options?
A. You can choose from various investment options depending on your financial goals and other important factors. You should follow the steps in financial planning to get a better idea of the best-suited investment option.
Q. Should I Invest in Mutual Funds?
A.Depending on how you invest in them. It can yield returns if you are careful and take calculated risks. It is important to note that the returns are dependent on market performance. Therefore, it is essential to determine your appetite for risk and financial situation before investing in mutual funds[1].
Q. What does Risk Tolerance have to do with Investment?
A. Risk tolerance refers to an individual's comfort in investing their money in a specific investment product. With investments that depend on the market's performance, risk-tolerance is an important factor to be considered.
It is crucial to analyse your risk tolerance to avoid any future disappointments with your investment decisions.
Q. What is a Diverse Investment Portfolio?
A. A diverse investment portfolio means that you have a wide range of assets and investments that comprehensively strengthen your financial situation. It ensures that there are multiple investments to back you up in case one fails.
Sources
[1] http://www.iepf.gov.in/IEPF/Mutual_Fund_Investing.html [Last updated: 2019]
https://www.ncfe.org.in/nsfe [2020]
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8335566/ [2021]
https://rbidocs.rbi.org.in/rdocs/content/pdfs/NSFIREPORT100119.pdf [2020]
ARN No : Aug21/Bg/27A
