Concept of Financial Planning and its Importance

The process of accessing the capital necessary and opting for its competition is known as financial planning. It is the process of establishing financial rules for an organization’s purchase, investment, and administration of funds. Financial planning is the practice of putting together a plan for your future, specifically around how you will manage your finances and prepare for all of the potential costs and issues that may arise. The process involves evaluating your current financial situation, identifying your goals, and then developing and implementing relevant recommendations. It’s not how much money you make that matters, but how much money you keep and how hard it works for you. As a result, financial planning isn’t about how much money you make, but how well you manage it while keeping your long-term goals in mind.

Concept of Financial Planning

Financial planning is a process that will lower your financial stress, meet your immediate requirements, and help you save for long-term goals such as retirement. This is vital because it allows you to maximize your assets while also ensuring that you achieve your long-term objectives.

Financial planning is not only restricted for the wealthy class but everyone may acquire benefit from creating a blueprint for their financial future. You can create a financial plan on your own or with the assistance of a financial planner.

The Idea of Financial Planning

The following are some ideas’ that one should keep in mind while conducting financial planning:

• Evaluate Business Objectives: Financial planning objectives are constantly concerned with analyzing and examining the value of the business goals regularly. To achieve their objectives, businesses of all sizes devise tactics, strategies, and approaches. You should assess corporate procedures and plans before putting them into action. Consider the following scenario: The goal of company improvement necessitates the use of tools and strategies to track and control the intended results.

• Availability of Funds: The fundamental goal of financial planning is to ensure that enough funds are available in the organization for various purposes, such as the purchase of long-term assets, meeting day-to-day expenses, and so on. It ensures that funds are available when they are needed. Financial planning seeks to describe the sources of finance in addition to availability.

• Proper Utilization of Funds: Excess financing is just as terrible as little or unavailable funds. Financial planning must invest surplus money in the best possible way if there is any, as keeping financial resources inactive is a huge loss for an organization.
  Short-term and long-term financial planning are both included in financial planning. Long-term planning focuses on capital expenditure plans, whereas budgets are short-term financial plans. Budgets offer a detailed action plan for a one-year term or less.

• Identification of Resources: Setting SMART goals (Specified, Measurable, Achievable, Relevant, and Time) can assist you to evaluate each of the targets you choose to create for your business. Take into account whether or not they’re practical. You should lay down your objectives in your company plan to ensure that you stay on track to meet them. Here are the objectives you should establish for yourself at the initial point of time.
  • • Specified – Establish a clear picture of the aim you intend to achieve.
    • Measurable – Make sure your objectives are measurable so you can see whether your objectives have been met.
    • Achievable – Confirm that your goal has all you need in terms of resources, cash, and time to achieve it.
    • Relevant – Make sure your aim is in line with the direction you want your company to go. For example, hiring additional people, boosting profits, rebranding, and so on.
    • Time – To achieve your goals, you must set some concrete deadlines.

• Understanding capital requirements: It is critical to have a clear understanding of the capital requirements for a projected expansion or acquisition of a new firm. It is determined by a variety of factors, including competition, market conditions, a company’s assets, and long-term planning. A financial planner can look through the book and other pertinent data to determine immediate and long-term capital needs.

• Capital structure planning: One of the most critical steps in financial planning is laying out a well-defined capital structure and making important debt-to-equity ratio decisions.

Procedure for formation of Sound Financial Planning

By following the procedure below, one can form sound financial planning:

• Be familiar with your existing financial condition: Determine your current financial situation, including your income, expenses, debt, savings, and investments. This is the first stage in financial planning since it offers you a clear idea of how your finances are doing and what you can do to improve them.

• Make a list of your financial objectives: Make a list on a piece of paper. Put down any objective you want because there is no such thing as a tiny or large goal. Make sure, that your objectives are explicit. Here are some examples of attainable objectives: ‘In the next 18 months, I want to buy a Rs. 13 lakh SUV.’

• Examine the various Investment Choices: Investors can choose from a variety of investment opportunities. There are approximately 2,000 mutual fund schemes to choose from in the mutual fund sector alone. Various investing options assist investors in achieving various objectives. Equity funds, for example, are appropriate for long-term goals such as retirement planning, child education, and so on. Debt mutual funds are a good option if you desire a pretty steady income and aren’t afraid of taking risks. ELSS funds (Equity Linked Savings Scheme) are a good way to save money on taxes. Many financial experts have emphasized the importance of mutual funds when it comes to investing. Consistently investing in these funds over time can help you realize your objectives and goals.

Advantages of Financial Planning

Importances of Financial Planning are as follows:

• It makes your savings grow: Without a financial strategy, it may be feasible to save money. However, it may not be the most efficient method. You will gain a lot of insight into your income and expenses when you make a financial plan. You can keep track of your expenses and consciously reduce them. In the long run, this will naturally enhance your savings.

• Benefit from a Higher Standard of Living: Most people believe that to make their monthly bills and EMI repayments, they will have to reduce their level of living. On the contrary, if you have a sound financial strategy, you won’t have to worry about it.

• Suitable in Emergency Condition: Putting together an emergency fund is an important part of financial planning. You must have a reserve that is equal to at least 6 months of your monthly wage in this case. You won’t have to worry about finding money in the event of a family emergency or a job loss this way. The emergency fund might assist you in meeting a variety of obligations on time.

• Attainment of Mental Tranquility: You can cover your monthly costs, invest for your future objectives, and spend a bit for yourself and your family without fear if you have enough money. Financial planning allows you to manage your money effectively while also providing you with peace of mind.

Five Important Things to do in Financial Planning

• Tax Preparation
• Increasing the return on investment
• Cut back on unneeded expenditures
• Maintaining the debt-free status 
• Keeping track of a financial goal

Let us discuss these important points one by one.

• Tax Preparation: Various taxpayers fail to claim a basic deduction of Rs. 1,50,000 under Section 80C of the Income-Tax Act, 1961, which provides a tax-free return on both the principal and interest component in many circumstances. PPF, Sukanya Samridhi Scheme, Senior Citizens Savings Scheme (SCSS), Tax saving mutual funds under ELSS, principal repayment of a housing loan, stamp duty payment of a residential house, children’s school fees, and so on are some examples.

• Increasing the Return on Investment: Human energy is finite, but as time passes, the economy and generations improve. We’re almost certain that the next generation will be more innovative, as well as speedier and more advanced. To profit from the compounding returns of successive generations, one must invest regularly. It is claimed that it is not how much you invest that matters, but how consistently you invest. To get the benefits of compounding, one must invest in tax-friendly and high-returning assets. Investing in Long Term Index Mutual Funds, NPS, PPF, and equities are the most straightforward options.

• Reducing Extra Expenditures: We can forgo the fast food and opt for home-cooked meals; we can opt for local commuting/carpooling over self-driving, and we can opt for a rental home rather than a large-ticket home with significant maintenance costs. Every penny saved adds to our fund. Create several income streams. To supplement your income and make use of the benefits of the current internet era, you should always have a side hustle or interest that helps pay for household bills. Weekend teaching, career counseling, guest lectures, assisting in the management and growth of local businesses, graphic design, video editing, and a variety of other money-making hobbies are all options.

• Maintaining the Debt-Free Status : Debts of any kind, whether on a credit card, a home loan, or a personal loan, are a curse for anyone who lives. Loan interest rates compound against us, causing a large hole in our pocketbook. We must strive to improve our lifestyles and never purchase anything that we cannot afford. The philosophy should be to earn first and then buy.

• Keeping track of a Financial Goal: In the financial world, it is stated that earning your first crore is the most difficult, but after that, compounding multiplies the money faster. One must have a financial objective in mind, such as owning a property, building an Rs. 1 crore savings account, or purchasing a car. A defined financial objective helps you stay on track with your education and earning potential. Every dollar we earn is invested for the benefit of society and the economy. Some millionaires and billionaires have regularly followed these easy tactics for a long time, which have paid them well and freed them from financial decisions.

Conclusion

Expenses and investment must be balanced. Because your monthly costs are often greater than your monthly savings, it makes sense to invest in compounding schemes such as mutual funds so that your money grows quicker. Not only will your money increase exponentially, but you won’t have to worry about the returns because the market attitude is positive and solid.

Always seek for investment opportunities that harness the power of compounding and provide long-term advantages. Starting early is usually advantageous. As you grow as an investor, you should also examine your investing objectives in a business on a frequent basis.