Financial Planning is an important aspect in human life as it helps individuals set & achieve their long-term financial goals, through investments, tax planning, asset allocation, risk management & retirement planning. It means maximizing one’s wealth by investing in different asset classes, so as to capitalize on their unique risks, rewards & liquidity attributes. It is therefore, becomes necessary for an investor to identify their financial needs & goals, understand their investment choices & decide an appropriate mix of various investment choices. Financial planning is generally recommended to start early as possible as when a person starts earning, so that he/she can benefit from the compounding by the time they reach their retirement stage. Compounding means the computation of interest paid using the principal plus the previously earned interest. Each investor has different goals in life & in order to achieve that goal in a systematic & planned way, financial planning is necessary & for financial planning to make successful in the long -run, an investor should understand their available finances in different forms & how he/she can best utilize the available resources (finances) to achieve greater returns & within a time frame set by them.
Hence, in clear terms, financial planning can be defined as an exercise aimed at identifying all the financial needs of an individual, translating the needs into monetarily measurable goals at different times in the future, & planning the financial investments that will allow the individual to provide for & satisfy his/her future financial needs & achieve his/her life’s goals. The objective of financial planning is to ensure that the right amount of money is available in the right hands at the right point in the future to achieve an individual’s financial goals.
Financial Goals can be either:
ï Buying a Home
ï Providing for a child’s education & marriage or
ï For retirement
These can be measured in monetary terms.
Personal financial needs are of two types – protection and investment. An
earning member providing for his family to have continued income after his
death is an example of protection need. Providing for the marriage expenses
of a daughter is an example of an Investment need.
Hence, Financial planner helps the customer to maximize his/her existing
financial resources by utilizing financial tools to achieve his/her financial goals.
Therefore, mathematically we can say:
Financial Planning: FR + FT = FG
FR = Financial Resources
FT = Financial Tools
FG = Financial Growth
About Financial Planner
A Financial Planner is someone who uses the financial planning process to
help another person determine how to meet his or her life goals. The key
function of a financial planner is to identify their financial planning needs,
their present priorities & the products that are more suitable to meet their
The financial planner normally possesses detailed knowledge of a wide range
of financial planning tools & products, but the planner’s major role is to help
clients choose the best products for each need.
The planner can take a ” big picture ” view of a client’s financial situation &
make financial planning recommendations that are right for the client.
The planner can look at all of client’s needs including budgeting & saving,
taxes. Investments, insurance & retirement planning or the planner may work
with his client on a single financial issue but within the context of his overall
situation. Therefore, planner is set apart from other financial advisors, like
tax advisors & insurance agents, who may have been trained to focus on a
particular area of a person’s financial life.
Basis for financial planning
Financial planners generally pursue “The Life Cycle Stage” for making a well-defined financial plan for their clients. As the need for each stage of life-cycle is different, thereby financial planner has to cautiously devise a well-suited financial plan for their clients so that they can meet their objectives successfully within a given level of time frame & resources. However, priorities will change as people grow older & their personal circumstances change.
The life-cycle of any individual can be typically sub-divided into the following stages:
ï Childhood Stage
ï Young Unmarried Stage
ï Young Married Stage
ï Young Married with Children Stage
ï Married with older Children Stage
ï Post-family/Pre-retirement Stage
ï Retirement Stage
Steps to derive maximum benefits from a financial plan:
In order to derive maximum benefits from a financial plan, retail Investors should take the following steps into consideration:
1. They should know their goals properly & with a clear insight to achieve them.
2. They should have a clear estimate of the time frame from their own personal experiences & observations to achieve their goal.
3. They should not rely solely on what financial advisors, news reports says, but should do a thorough research of their own about the nature & potential of stocks’ generating returns that a particular scheme invests in.
4. They should not be drawn by emotional sentiments of the market.
5. They should not time the market for entry or exit. General rule says the best way to enter the market is during bearish phase.
6. They should try to analyze their risk-taking appetite while going for investments. If, facing problem, they can also take help from financial experts.
7. They should timely review their portfolio as & when market fluctuates or at the time of inflation.
8. They should be well-versed about financial statements of those companies time-to-time whose stocks they are preferring.
9. They should have a sufficient back-up of their additional financial resources at the time of losses, in case, if it happens.
10. They should diversify their holdings even through mutual funds as much as they can in order to minimize the risk.
Author Biodata: Shefali Sinha is an avid financial writer who helps