Why Financial Planning Isn’t Just for the Rich—It’s for Everyone
A Smart Financial Plan Starts with Financial Planning!
When our life gets busy, it’s easy for us to forget about planning for the future. But taking a little time today can help leap forward for a better, more peaceful tomorrow. Financial planning is one such aspect that is often confused about. It doesn’t mean cutting out everything you enjoy—it’s about learning how to balance spending with saving.
Let’s spring to action and learn about the importance of financial planning for beginners and explore the steps involved in financial planning that you can take to scale up your future!
Process of Financial Planning
Financial planning is the process of managing your finances in a way that helps you achieve both short- and long-term goals in your life. It’s about balancing what you earn, what you spend, and what you save, all while preparing for unexpected expenses of life. A well-thought-out financial plan is all that you need in life! This helps achieve financial freedom.
Nisha, for example, has been living paycheck to paycheck, but after learning about the importance of financial planning, she now understands that with a little effort, she can set herself up for a secure future.
Financial Planning Meaning – In simple terms, financial planning means creating a well-thought-out strategy for your hard-earned money. It involves taking a look at your current financial situation, setting long-term goals, and figuring out the steps to achieve them.
Let us understand this with a simple financial plan example!
For instance, you might want to save ₹15 lakh for a downpayment in five years to buy a house. By following the right steps in financial planning, you will know how much you will have to save each month.
Components of Financial Planning
Here are the most important components of financial planning:
| Component | Description | Financial Plan Example |
| Setting Financial Goals | Identifying clear, realistic short-term, medium-term, and long-term goals. | Short-term: Save ₹20,000 for a gadget in 6 months. Long-term: ₹50 lakh for sending your kid abroad for education. |
| Income and Expense Management | Tracking income and expenses to understand where your money goes and to plan savings. | Income: ₹30,000/month, Expenses: ₹25,000/month, Savings: ₹5,000/month. |
| Creating a Budget | Allocating income into categories like needs, wants, savings, and investments. | Essentials (50%): ₹15,000, Wants (30%): ₹9,000, Savings (20%): ₹6,000. |
| Building an Emergency Fund | Saving money for unexpected situations such as medical bills or urgent repairs. | Save ₹90,000 to ₹1,80,000 if monthly expenses are ₹30,000. |
| Debt Management | Managing and paying off debt, especially high-interest debt, to avoid financial strain. | Pay off ₹10,000 credit card debt before taking new loans. |
| Savings and Investment Planning | Allocating money towards savings and investments to build wealth over time. | Save ₹3,000 in a Fixed Deposit, and Invest ₹5,000 in a mutual fund SIP. |
| Insurance Planning | Protecting yourself and your family with health, life, and property insurance. | Health insurance of ₹5 lakh, Life insurance of ₹10 lakh. |
| Tax Planning | Using legal methods to reduce taxes, like investing in tax-saving instruments. | Invest ₹1.5 lakh in PPF or NSC to claim tax benefits under Section 80C. |
| Retirement Planning | Saving for the future to ensure you have enough funds after you stop working. | Invest in NPS or a pension plan for regular income after retirement. |
Importance of Financial Planning in India
Financial planning plays a crucial role in shaping your financial future, and here’s why:
1. Helps You Stay Disciplined
Without a solid financial plan, it’s easy to overspend or fail to save enough for future needs. For example, if you have a goal to save ₹2 lakh in two years for your child’s education, you need to know how much to save each month and where to put that money (fixed deposits, stocks, or mutual funds).
2. Prepares You for Financial Emergencies
Life is unpredictable, and we all can experience emergencies. Whether it’s a medical emergency, a house fire, or sudden home repairs, having a financial plan ensures that you’re prepared for the unexpected.
Take a simple example: A family living in a city like Delhi might face a medical emergency where the cost of treatment could be ₹50,000. If they had financial planning in place, they would have set aside an emergency fund in a zero balance savings account to cover such expenses without affecting their regular budget.
3. Create a Roadmap for Your Future
If you want to buy a house, send your children to college, or retire comfortably, you need a financial plan. Financial planning helps you set these long-term goals and break them down into achievable milestones.
For instance, let’s say you want to retire with ₹1 crore by the time you are 60. To achieve this, financial planning will guide you on how much you need to save every month and which investment options to choose (like bonds, mutual funds, stocks, or real estate) to reach that goal.
How to Do Financial Planning? Let’s Explore the Steps Involved in Financial Planning
Start Financial Planning in 5 Easy Steps!
1. Gathering Your Financial Data: Understanding Where You Stand
You need to start by analysing your current financial position. Gather all the necessary details, including:
- Income: Your monthly or annual salary, business earnings, or other sources of income.
- Debt level: What do you owe? This includes personal loans, credit card balances, or home loans.
- Commitments: These are the things you’ve promised to pay for, like bills, school fees, and family expenses.
For example, Shantanu knows he earns ₹50,000 a month and has ₹2,00,000 in student loan debt. Knowing this helps him see where he stands financially.
2. Identifying Your Goals: What’s Your Dream Future?
Now that you know where you are, it’s time to think about where you want to go. Your goals are what will launch your financial plan into action.
For instance, Shantanu dreams of owning a house in 5 years and wants to start saving ₹20,000 every month toward that goal. Knowing his goal gives him direction and purpose.
3. Identifying Financial Issues or Gaps: Find Your Financial Blind Spots
Next, take a step back and look for any gaps between your current financial state and your goals. Do you need more savings? Are there any unnecessary expenses draining your money? Is there a gap between your income and your long-term goals?
For example, Shantanu notices that his student loan is a significant burden. The gap between his current debt and future aspirations is something he needs to address to dash towards financial freedom.
4. Preparing Your Financial Plan: The Ultimate Roadmap
Once you’ve identified the gaps, it’s time to spring to action by crafting a financial plan. This plan will help you prioritise your goals and outline the best steps to get there. It may include:
- Recommended investments (such as bonds, mutual funds, stocks, or fixed deposits) based on your risk tolerance.
- Adjustments in spending to save more each month.
- How to handle emergencies (e.g., setting up an emergency fund).
Shantanu’s financial plan suggests investing ₹5,000 monthly into a low-risk mutual fund while putting ₹10,000 towards his student loan.
5. Implementing and Reviewing Your Financial Plan: Keep Moving Forward
The final step is where you launch your plan into action. This includes not only following through with your investments and savings but also reviewing and revising your plan regularly. Your financial situation will change over time, and so will the economic climate.
For instance, Shantanu decides to check in on his plan every six months. If his income increases or his living expenses change, he’ll revise his plan accordingly to ensure he’s on track to reach his goals.
Types of Financial Planning
There are various types of financial planning, depending on your needs. These include:
1. Budgeting
Budgeting is about tracking your income and expenses. It helps you manage how much money comes in and goes out.
2. Savings Planning
This involves setting aside money regularly for future needs or emergencies.
3. Retirement Planning
This type of planning ensures you have enough money when you stop working.
You can invest in the Employee Provident Fund (EPF) or a National Pension System (NPS) to save for your retirement.
4. Investment Planning
Investment planning is about putting your money into assets like stocks, bonds, or mutual funds to grow your wealth over time.
5. Insurance Planning
This involves getting insurance to protect yourself and your family from financial loss.
6. Tax Planning
Tax planning is about managing your income to minimise tax payments while staying within the law.
You can invest in tax-saving instruments like the Public Provident Fund (PPF) or National Savings Certificate (NSC) to reduce your taxable income.
Writing a will to decide who gets your property or savings when you’re no longer around.
Benefits of Financial Planning
These are multiple benefits of financial planning in India!
1.Financial Freedom
When you know where your money is going and have control over it, you’re on your way to financial freedom. You don’t have to worry about how to pay your bills, as everything is planned and managed.
2. Better Savings and Investment
Financial planning helps you identify areas where you can cut back and save more. With a well-thought-out plan, you can make smarter investment choices and grow your wealth.
3. Achieving Financial Goals
Whether it’s buying a house, going on a vacation, or securing a comfortable retirement, financial planning helps you achieve your goals step by step.
Educational Resources on Financial Planning
If you’re looking to learn more about financial planning, there are plenty of resources available to help you get started:
Several books explain the principles of financial planning in simple terms. One of the most popular ones in India is “The Richest Man in Babylon”, which uses storytelling to explain personal finance basics.
Professional Financial Planning Certification
If you are considering a career in financial planning, the Certified Financial Planner (CFP) certification is one of the most respected in the industry. If you’re passionate about helping others with their financial goals, obtaining a CFP certification can open up opportunities in advisory roles and financial consulting.
Conclusion
Financial planning is not just for the wealthy or business owners—it’s for all of us. Whether you’re saving for your own wedding, planning for a business startup, or simply trying to make ends meet, financial planning means that you can create a solid strategy that helps you achieve your goals.
Start planning today, and dash towards your financial goals with confidence!
Financial Planning: FAQs
Financial planning is about managing your income, expenses, and savings. It helps you set and achieve your financial goals, like buying a house or saving for retirement.
The 5 steps include assessing your finances, setting goals, creating a plan, implementing it, and regularly reviewing your progress.
The 7 steps are understanding your situation, setting goals, analyzing options, creating a strategy, implementing the plan, monitoring progress, and updating as needed.
A financial planner is a professional who helps you manage money. They guide you on saving, investing, and planning for future goals.
The three types are personal finance, business finance, and public finance. Each focuses on managing money for specific needs.
The 7 steps include assessing your finances, defining goals, analysing needs, developing a strategy, executing the plan, monitoring results, and revising as necessary.
