Financial Planning- Definition, Objectives and Importance

Overview of Financial Planning

Definition Financial Planning

To keep it simple, financial planning is nothing but setting a long-term goal and the strategies to achieve those goals (money-wise).

Now, your long term goals could be anything from buying a house to funding your children’s education to starting a business, or maybe retiring on time. Such goals require a good amount of money, and you can not of course buy a house just by keeping your leftover salary in bank accounts. So, here comes financial planning. You may either plan your finances on your own or with the help of a certified financial planner.

In either case, financial planning begins with an accurate and in-depth evaluation of your current financial state and future expectations. Here, the current financial state means calculation of your net worth, which is the sum of your total assets, minus your total liabilities. For your better understanding, your assets may include a home, a car, some cash in the bank, money invested in mutual funds or elsewhere, and anything and everything you own of value. On the other hand, your liabilities may include credit card debt, student debt, a car loan, and an outstanding mortgage.

Objectives of Financial Planning

The objectives of financial planning vary according to the individual who wants to strategize his/her finances. But here are some common perspectives of people who step into this game:

  • Adequate Funds: Planning your finances ensures that you have sufficient funds available at every point of time, may it be for running a successful enterprise, or for personal stability (money-wise).
  • Balancing of Costs and Risks: One of the most important features of financial planning is that it helps you balance your cost and risks with the detailed analysis of in-flow and out-flow of cash. The investors need to establish risk factors to balance the cost if and when required.
  • Flexibility: A financial plan should be laid out in a way that it can be adjusted with the changing conditions without compromising on benefits.
  • Simplicity: The more the number of different securities the more complicated is the financial plan. So, a financial plan should be simple, uncomplicated, and easily understandable.
  • Long-term View: A financial plan helps to take into account a long-term view of your goals, expenditures, saving, and investments. This helps in understanding the needs of funds in the near future.
  • Liquidity: A well structured financial plan always ensures that you quickly get your hands on your cash during the period of depression to stay afloat.

Importance of Financial Planning

There is a myth around the people who think financial planning is required only by business individuals, which is not at all true. In fact, if you start planning your finances from the very beginning of your earning journey, however little it might be, you will be able to achieve some unexpected financial goals. Financial is planning is crucial for all individuals in many ways:

  • Family Security: With proper financial planning, you will have insurance coverage and policies in place that can provide peace of mind to you and your family.
  • Investment: It is important to evaluate your personal circumstances while keeping in mind the objectives and risks. And this is what a financial plan does for you, it guides you to choose the right types of investments to fit your needs and goals.
  • Standard of Living: A financial plan helps you create enough savings to continue a lifestyle even if a family breadwinner becomes unable to work.
  • Assets: It is important to maintain your assets and not let them turn into liabilities. With financial planning comes greater knowledge of risk and considerations of expenditure. So even if you see yourself going down somewhere, you will know how to act proactively to secure the future.
  • Savings: No matter how much savings you have accumulated, it’s useless if you can’t use it right when you need the money. So, proper financing helps in making sure that you have saved and invested money for every type of situation.

Now that you know all about financial planning, plan yours and secure your future in every possible manner.