Tough times can never be avoided. It is said that tough times don't last, but tough people do. Financial market is a mixture of tough and good times. Even those who are experts in the financial world will face tough times. Financial planning will help us in reducing the depth of loss and to convert the loss into profit. In this scenario, it is important we should not get carried away by the group mentality. During tough times, we should follow some basic financial steps to make sure that we have our financial plan in place and follow the same carefully to gain its benefits throughout our future life.
The word financial planning can be defined in a number of ways. The objective of financial planning is very simple that a person must not run out of money whenever a present or future requirement occurring to him or his family. In India, especially middle class families are not well conscious about the benefits and importance of a good financial planning. This will put them in trouble once if they don’t have sufficient income to manage their needs.
Types of People
Under financial planning context, we can divide people into three major categories such as;
- Those who let it happen
- Those who make it happen
- Those who wonder what happened
The first category “those who let it happen” don’t bother about their future, they just let their life to go without any planning. The second category “those who make it happen” are really hard working and by their proper planning, they will make their future bright. Third category “those who wonder what happened” want to make their future joyful and happy but don’t want to plan. This category of people will always worry after losing an opportunity.
Out of these three categories of people, the second category of people will be always successful. The hard work and determination makes them to achieve great goals in life.
Process of Financial Planning
Accurate financial planning is not a single or simple process. Instead, it involves 3 major phases such as :
- Self Assessment
Self assessment is the primary step one has to complete before planning his finance. Doing a self assessment make him capable to understand his current wealth status and responsibilities. Following are the things to be covered in the self assessment process.
- Main source of income
- Dependents in your family
- Monthly savings
- Current investment status?
- Retirement age
Planning requires your attention to lots of areas where possible mistakes can happen and that can cost you. When planning the finance, one must take care of the following points with great care :
- Self protection and protection of dependents from accidents and medical treatments
- Securing family and dependents from any future consequences happening to your life
- Protect your major assets
- Protect yourself and family from mortgages and loans
- Meet the unexpected expenses that may occur
- Plan for your children
- Plan for your retirement
- Plan your investments and balancing the same as per your age, risk profile, goals, etc.
- Financial advisory if required
- Monitoring your wealth and investment status
Execution phase required more efforts than the above mentioned 2 phases. Once after completing the same, it is a necessity to monitor the status time to time to understand the status and act as per any action if necessary depends on your life changes or requirements.
Financial Stages of an individual's life
Knowing and understanding the financial phases of life acts as a road map and helps you in designing a strong financial foundation to improve your chances of meeting your goals. No one wants to become a burden on our families, relatives or friends. The life of a human being goes through three phases of life. If you are able manage these phases in a proper manner, you will have financial stability in life. These financial phases of life can be summarized as :
- Accumulation phase
- Distribution phase
- Preservation phase
The accumulation phase
This is the period of accumulating assets that will contribute to your wealth. In this stage earning potential is huge and your expenses are less. During these phase you are likely to maximize your savings and invest the same to ensure better returns in future. Your risk taking capacity will also be high on this stage.
The distribution phase
Distribution phase is the period when you get to enjoy the benefits of wealth, when you are able to withdraw income from your assets. The family responsibilities, repayment of loan EMIs and expenses are playing an important role in your cash flow. In this phase the stress would be more on fulfilling your life goals and parental responsibilities.
The preservation phase
This is the period when you plan to preserve and protect your accumulated wealth and prepare to safely transfer it to your legal heirs. Most probably in this stage you will be leading your retired life. Here the cash inflow (income) will be very less.
Knowing these three phases of life helps you to understand yourself and lead a better future. Financial planning is the task of determining how an individual will afford to achieve his life goals and objectives. Preparing a written financial plan is very important to the success of any individual's life.
Steps to make your future safe
Following are the basic steps to make your future financially safe;
- Evaluate your financial status
- Fix your financial goals
- Develop a financial plan for you
- Implement and track the plan
Evaluate your financial status
Prepare a basic financial check list of your income, expense, assets and liabilities. This will help you to understand your financial status. Understanding your overall income and spending habits will help you in fixing your financial goals.
Fix your financial goals
Once you evaluate your financial goals, make a list of your future financial goals of life. It may include buying a home, purchase of a car, children’s higher education, daughter’s marriage expenses etc. You won't be able to imagine these cash outflows unless you write them down. Fixing of financial goals will help you in developing the suitable financial plan/strategy.
Develop a financial plan for you
Financial plan depends on your financial goals. Preparing a financial plan is a one-time activity. You should know how you can meet your goals and objectives keeping in mind your present and future resources. Experts can help you in developing a financial plan.
Implement and track the plan
Once you design a financial plan it becomes very important to implement the plan and track the same. Having a good plan and not taking any steps to implement will not help you in any respect. This is the most important step as you need to act on the plan if you want to get it going. Mere implementation is not enough to achieve the financial goal, proper tracking also should be there.
A good financial planning will help you in finding easy and practical solutions for the following;
- Managing debt
- Reducing expenses
- Coping with unemployment
- Minimizing complications if your financial institution fails
- Protecting your retirement savings
- Making informed decisions about your home and mortgage
- Improving your credit standing
- Preparing for financial emergencies
In our next articles we will discuss different financial plans to be adopted in various financial conditions such as :
- Financial crisis
- Unemployment, etc.