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What is Financial Planning?

Financial planning is a step-by-step approach in determining how you would meet your life goals with your money. A good financial plan will help you to remain in control of your expenses and investments at all times. It examines your goals, helps you prioritize, save and invest money in order to achieve targets in the defined time. 

For instance, you may need Rs. 25 Lakh for your daughter’s college education by the time she turns 18. For that, you need to have proper financial planning and investments to achieve the goal.

Financial planning can also be defined as the process of managing your money to achieve personal financial satisfaction. You will be able to control your financial situation by following such a planning process. 

Every individual, family, and household has a unique financial position and all financial activities must be meticulously planned to meet specific needs and goals.

A comprehensive financial plan enhances the quality of life and increases your satisfaction as it does away with all uncertainties about your future needs and resources. 

The specific advantages of personal financial planning include greater effectiveness in obtaining, using, and protecting your financial resources throughout your life.

Recommended Read: Difference Between Financial Planning & Wealth Management

Importance of Financial Planning

Financial planning plays an important role in giving direction to your goals. It helps you set short-term and long-term goals in life and helps you make financial decisions more easily.

Financial planning instills discipline in terms of managing your money. You cut on unnecessary expenses and start saving. The following points will help you understand the importance of financial planning;

1. Helps manage income

A good financial plan helps you manage your income better. We need money for our basic needs but occasionally tend to splurge on unnecessary luxuries. Planning your finances will keep a check on your expenses and help you make savings.

As you will have a budget ready, you can easily assess whether you are overspending or are within budget. This will help you understand how much you need to save to reach your goals.

2. Help choose investments

It is essential to have a financial plan for choosing investments in line with your income, risk capacity, and goals. This will help you maintain a balanced investment portfolio at all times. 

A sound financial plan will also help you assess your tax obligations at the beginning of a financial year. So you can plan your finances accordingly in such a manner that you pay the least amount as tax legally.

3. Retirement lifestyle

Relaxed retirement life is possible only if your finances are in a healthy state and are in order. This means having enough cash reserves for medical expenses and other emergencies. 

A proper financial plan will have your retirement goals listed, including your income and expenses as detailed as possible.

4. Manage inflation

Financial planning helps you manage inflation by planning your budget in a better way. This eventually gives you peace of mind because then only you will be able to get a clear picture of your future finances. 

You will be aware of when your investments will give returns and how and when you will achieve your goals.

5. Takes care of the estate 

A financial plan will guide those taking care of your finances to manage your estate efficiently. Financial planning includes estate planning, which means the smooth distribution of your wealth after your death.

In essence, a proper financial plan makes things smoother. Life is unpredictable, any untoward incident can happen at any moment and you may need money urgently. 

Objectives of Financial Planning

Financial planning anticipates future cash requirements and ensures smooth cash flow at all times. 

Financial planning allows you to control your financial matters by avoiding excessive debt and dependence on others. It improves personal relationships as all financial decisions become well planned and are communicated to others effectively. 

Personal financial planning instills in you a sense of freedom from financial worries by helping you anticipate expenses.

The objectives of a sound financial plan are to make you cash ready by creating reserves to meet the following needs;

1. Medical Emergencies

Medical expenses are an area where cash flows out unexpectedly. Therefore, the first part of your financial plan should be focused on protecting yourself and your family through a good medical claim policy. 

Doing so will also take care of any unexpected expenses related to medical emergencies. Besides protection from medical expenses, you can also avail of tax benefits under the Income Tax Act.

2. Insurance

 The term insurance component of financial planning offers you the much-needed protection for uncertainties. Term policies require low premiums and provide maximum protection, making them cost-efficient. 

Term policies also provide you tax exemptions under India’s Income Tax Act. Further, you can apply for policies to protect major assets such as your home and vehicle from theft, fire or other unforeseen incidents.

3. Children’s future

One of the prime objectives of a financial plan is to keep us prepared for our children’s expenses, like their education and wedding. 

Mutual fund investments can help secure our children’s future. Investment in equity mutual funds or children’s fund can help build a corpus of wealth until they turn into young adults. 

4. Retirement

Proper financial planning will help you plan better for your retirement period right from the beginning of your career. 

You can choose investment instruments such as mutual funds, bank fixed deposits or invest in the stock market through expert advice. This will help in timely creating a retirement fund so that you lead a happy and relaxed retired life.

Types of Financial Plans

Financial plans consider future fund requirements in three stages. These stages form the basis of the financial plan categorization. 

Let us have a look at the types of financial plans.

1. Short-term Financial Plan

The short-term financial plan outlines financial goals and the investment needs for a one-year period. Such a plan is less uncertain than a long-term plan and can be easily corrected if required. The short-term financial plans include creating an emergency fund. 

The corpus requires you to at least have funded four times your monthly salary. The emergency funds are helpful in meeting medical exigencies and temporary income loss.

The emergency funds can be created by investing in liquid mutual funds.

2. Medium-term Financial Plan

A financial plan for a period of five to seven-year comes under medium-term plans. This is the period wherein you have goals to buy your dream vehicle, go on a foreign vacation or purchase a house by cashing in on your investments.

You can also look for creating a safe multipurpose corpus of the fund to retire a loan or for your wedding expenses. 

The medium-term financial plans identify above life goals that need an assured amount of money. It will also suggest you make investments in debt mutual funds, bonds or fixed deposits in order to help you achieve your goals.  

3. Long-term Financial Plan

The long-term financial plan is for periods over seven years and beyond. Planning for the long-term is essential to enjoy financial security in your retirement years.   

Preparing for children’s higher education and wedding also come under long-term financial planning.

The long-term plans can be best met through investments into equity mutual funds and shares. This is because over a longer horizon the market volatility levels out and you have better chances of earning higher returns. 

How to do Financial Planning

Most individuals want to handle their finances for getting full satisfaction from each rupee spent. Financial goals include a new car, a bigger home, a foreign vacation, and self-sufficiency in retirement. For achieving these goals, you need to identify them and set priorities. 

The financial planning process involves a six-step procedure.

1. Determining your present financial status

The first step of a financial planning process is to determine your current financial status in terms of income, savings, living expenses, and debts. This is your present net-worth. 

You can prepare a list of existing assets and debt balances and the money spent on various items. Doing so will create a foundation for financial planning activities.

2. Developing financial goals

Developing financial goals refers to analyzing & identifying how you feel about money and why you feel that way. The reason for this analysis is to differentiate your needs from your wants. 

Specific financial goals are very important for creating a proper financial plan. You must decide which financial goals to pursue. Your financial goals can vary from spending all your current income to developing extensive savings & investment plans for financial security and freedom in the future.

3. Identifying & evaluating alternatives

While planning, it is vital to be creative because it helps in arriving at effective choices. You will be able to make more effective and satisfying decisions if you consider all of the possible alternatives.

Even though many factors influence the alternatives, the possible course of action typically fall under the following categories;

  • Continuing the same course of action
  • Expanding the current situation
  • Changing the current situation 
  • Taking a new course of action

The alternatives represent possible courses of action and all of them will not apply to every decision-making situation.

You should evaluate possible courses of action by taking into consideration factors such as your life situation, personal values, and current financial condition. 

4. Evaluating risks

Every decision-making involves a certain degree of uncertainty. For example, you may not be able to build a multi-crore corpus of funds for retirement as desired. This can be due to market volatility, downtrend or inadequate returns from your investments. So there is an element of risk in every step. 

Other decisions entail low risk or no risk at all and these could be depositing money in a savings account or purchasing items of everyday use. Your chances of losing something of great value are lower/ zero in such situations.

In many financial decision-making situations, identifying and evaluating risk is a difficult task. Hence, you must keep on obtaining relevant information related to your financial plans. You must continually build up and update your knowledge as personal, social and economic conditions do not remain static.

You also have the option to take the help of financial planning experts. 

5. Creating and implementing a financial action plan

The next step of the financial planning process is developing an action plan. This refers to choosing ways to achieve your goals in a systematic manner. 

Once you achieve your short-term goals, the goals next in importance will come into the limelight, until you have all the short, medium and long term financial plans covered.

You can take the assistance of an expert while implementing your financial action plan. This will involve making investments into financial assets like mutual funds, liquid funds PPF, ELSS, and bank deposits.

6. Re-evaluating and revise your financial plan

Financial planning is a constantly changing process and does not come to a halt when you take a certain action. This means assessing your financial decisions on a regular basis. Frequent assessments become necessary given the changes in personal, social and economic factors.

In situations of medical emergencies or accidents, the existing financial planning process will become an instrument for adapting and adjusting to such an unto event. Post the event you once again need to revisit your plans.

Reviewing the decision-making process regularly will help you make adjustments to your priorities. Doing so will align your financial goals and activities with your current life situation.


You may think that time is with you, but you may not continue to work throughout your life. This means your income and other financial sources will not remain the same forever.

It requires real work for anyone to live on their own terms even after retirement. This goes to show the importance of financial planning and should nudge you to go for sound financial planning for your future years. 

Frequently Asked Questions

What are the benefits of financial planning?

Financial planning is a process of determining a way to achieve financial goals. It helps set financial goals to achieve in life. Financial planning acts as a guide for decision making. It sets a road map for a secure financial future. One can decide on where to invest and when using a financial plan. It also helps set standards and helps in continuous monitoring of the performance of investments with the goals. Financial planning helps not only secure the financial future but also reduces mental and emotional stress. It also acts as a great source of motivation.