Clarity about finances is arguably one of the essential factors behind overall financial success. This is why each individual must understand their financial commitments in relation to their income and act on a Financial Plan compatible with them. Continue reading to learn the ins and outs of Financial Planning and Investing.
What is Financial Planning?
In simple terms, Financial Planning is the process of following a strategically outlined roadmap for achieving one’s financial goals. Please don’t mistake it for shuffling your finances and making space for additional investments; that’s too narrow an approach. It will help if you think the bigger picture. Narrow down your life goals and establish financial milestones that complement those goals. Financial Planning really boils down to setting balanced financial milestones and following through by taking informed decisions.
Key Elements of a Financial Plan
Let’s have a look at the key elements that constitute a balanced Financial Plan.
Outlining Financial Goals
This entails identifying one’s long and short-term goals, quantifying them by factoring in inflation and setting deadlines for achieving them.
Expenditure Budgeting
Expenditure budgeting is basically money management, wherein the individuals concerned actively reduce their expenses to save money. This determines the volume of investment to be made for achieving the outlined financial goals. But this needs to be done with care, without making any unnecessary or unwanted sacrifices. Moderation is the key!
Assessing the Risk Profile
Herein, your financial advisor will determine your risk tolerance based on your age, income, expenses, financial liabilities and certain other variables. Simply put, this is a measure of the investor’s ability and willingness to take risks. Deducing risk profiles is a fundamental requirement for outlining Financial Plans. Why? Because the investments recommended thereafter ought to be compatible with the individual.
Asset Allocation
This refers to the mix of asset classes in your portfolio. Diversified asset allocation is critical in Financial Planning as it facilitates risk mitigation and, consequently, fulfilment of financial objectives.
The Benefits of Planning Your Finances
It Helps OneStay Prepared for Emergencies
A well-established and acted upon Financial Plan helps one stay prepared for the uncertainties of life. Creating an emergency fund is a critical aspect of planning finances as it ensures that the individual concerned has access to sufficient funds to tackle any unforeseen emergencies.
It Facilitates Smoother Transition
Our priorities and monetary obligations change as we progress from one stage of life to another; it’s common knowledge. Financial planning helps us figure out our financial needs at various stages of life and build the finances needed to live through each step comfortably.
It Helps Save Tax
Tax planning helps individuals and entities maximize their savings by reducing their tax outgo. Including a suitable tax saver in one’s portfolio can help attain maximum tax efficiency, reducing their tax liability at year-end and facilitating seamless expenditure budgeting over the next year.
It Practically Guarantees Peace Of Mind
Financial planning entails actively managing one’s portfolio and ensuring that they have enough finances to meet all the upcoming needs, be it approaching retirement or a child’s college admission. With a well-balanced Financial Plan in place, individuals no longer have to stress over manipulating their finances and can enjoy peace of mind.
So there you have it, folks- Financial Planning- Definition and Benefits. Let us know your thoughts about this post by leaving a reply in the comments section. Also, please check out our post on –7 Simple Principles for Building Wealth.
