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Introduction to Financial Planning
By admin | August 9, 2011
Financial planning is a systematic way of planning an investment to get maximum returns with minimum risks. It includes: investment, tax, education, children’s future, cash flow, insurance, business succession and retirement planning. There are two types of financial-planning: personal and corporate. With basic knowledge and determination to create and follow a financial plan, you can mange your own finances. However sometimes because of the complexity of a financial strategy, professional assistance is required. This assistance is provided by the professionals known as the financial planners. They can be an individual or a company and are generally employed by organizations to handle there finance related issues like forming organization’s budget and determining how a particular financial decision affect other areas of finance.
Following steps are involved in creating a personal-financial plan:
Financial Planning
Step1: Determine your financial goals (like taking up higher education, covering your medical expenses, handling medical emergencies, buying a new house, securing life after retirement, improving your living standards etc) and prioritize them.
Step2: Determine your desires (like purchasing a lap top, high end cell phone, home appliances, car etc) and prioritize them.
Step3: Determine how much money is required to fund each goal and desire.
Step4: Determine your current position. It includes determining your annual expenses, annual savings and available resources.
i) Determine annual expenses:
House Rent: RS 2750
Water: 100
Electricity: 225
Cable: 150
Domestic Help: 175
Transportation: 275
Food: 3500
Cell Phone: 275
EMI: 1777
Entertainment: 300
Miscellaneous/unexpected: 1000
Total Monthly Expenses: 10, 527/-
Annual Expenditure: 10, 527 * 12= RS 1, 26324
ii) Determine annual savings:
Annual Savings = [Gross-Total-Income] – [Annual Expenditure + Total Tax Paid]
= 2, 10000 – [1, 26324 + 15500] = RS 68, 176
iii) Determine available resources
Your qualification, work experience, current salary, possibility of growth in your career, self occupied property, your current savings and investments are your available resources.
Step5: Determine up to which extent your goals and desires can be achieved through available resources.
Step6: If available resources are insufficient, then you have to adopt following strategies:
i) Increase your financial resources through investment planning
ii) Reduce your tax liabilities through Tax planning
iii) Cut down your monthly expenditure
iv) Make your goals and desires more realistic.
Step7: Periodically monitor your financial plan and review it. Whenever there is a drastic change in a life situation like marriage, children, divorce, serious accident, and death in a family etc, you will have to review your financial plan completely from the scratch
Introduction to Financial Planning
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