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What is Financial Planning?

Various web definitions suggest / define financial planning as:

 “Financial planning is the process of meeting one’s future requirements through a properly developed financial plan considering the life goals of an individual. Life goals will vary from individual to individual.”

 “Financial planning is the process of determining the future requirements of an individual, setting his goals, managing his finances and monitoring the progress for achieving the goals.”  

 “Financial Planning is the process of meeting one’s life goals through the proper management of personal finances.”

 The definitions discussed have few things in common:

1. Financial planning is a process.
2. Process is initiated for meeting goals.
3. Managing personal finance.
4. Periodic review.

Financial Planning is a Process:

 This process can broadly be categorized under 7 steps to deliver a financial plan:

1.  Gathering client information.
2. Analyzing and evaluating the gathered information.
3. Risk profiling of the client.
4. Constructing a financial plan based on risk appetite and goals of the client.
5. Implementing the recommendations.
6. Periodic review and monitoring the financial plan.
7. Re-balancing and modification (if required) in financial plan.

Meeting Goals:

 Individuals and families have many goals in life to fulfil for which they will have to save, accumulate and grow their money. Many a times a proper financial planning also help us determine our prime goals with more clarity. The most common life goals are: 

1.  General Goals.
2. Tax savings.
3. Retirement Plans.
4. Special circumstances.

Managing Personal Finances:

 Key part of financial planning is about managing finances of an individual or a family. While offering solutions to clients, the following aspects of personal finance should be analysed as a whole rather than seeing them in isolation:

1.  Income
2. Expenses
3. Assets
4. Liabilities
5. Insurance
6. Taxation

Periodic review

 Post implementing the financial plan it may happen that returns are not coming as per the expectation of the plan here it will be imperative for periodic logical shuffling within the portfolio and re-balancing the portfolio. This will happen only if the plan made is monitored and reviewed periodically. At some point of time it can also happen that goals so decided are modified by the client and same has to be taken care of.

 Need for Financial Advisory Services

 So far we have discussed about financial planning and its use. Now 

an obvious question is how to do financial planning, how to make a financial plan. Well, there are several ways for it but 3 common ways which I foresee are; first, a plan can be made by self using our decision and expertise, secondly, can be done using tools of asset allocation available on net and lastly, can be done by hiring a professional financial planner on his cost. This decision is somewhat like going for medication when countered with cough & cold; whether to consult a doctor or to take some commonly and easily available medicine on self judgement. All of us know what the right way is!

 In past two decades social economic conditions have changed a lot; it won’t be wrong to say now the factors driving the need for financial advisory services are many and increasing gradually, these factors are lead by strong economic growth experienced over the last two decades resulting into rise of household income and disposable income but other effect of this development is that now an individual have a lesser time for activities other than his core business. Simultaneously we have also seen the abundance of product availability across all the asset classes like insurance, equity, debt etc; few people consider it as a side effect that now even gold “a distinctive asset class” which earlier was used only as an ornament now can be held in demat account if not lump-sum than in SIP mode.

 In past two decades interest rates on the debt instruments have fallen considerably forcing the investor to seek other asset classes including direct equity and mutual funds in order to beat inflation. Therefore, most of the savings which were earlier parked in investments like fixed deposits and bonds are finding alternate investment avenues for savings, countering the inflation and diversifying the portfolio.

Thus, we can say it’s now easy to invest but difficult to manage its investments. This is yet another factor for a common man to hire a Financial Planner who can guide him through the maze of products help in constructing a portfolio which is as per his risk appetite and committed towards achieving his goals.