Every individual aspires to have a life without thinking much about their expenses, but most of them do not have a rigid financial plan to meet their lifestyle needs. Financial security is often left at the hands of luck and chance. To have a financially secure future, it is imperative to have a good financial plan and indulge into strategic financial planning that takes into account all your future goals and is guided by a certain time limit.
What is Financial Planning?
Financial planning refers to a systematic approach through which individuals develop a comprehensive plan to manage their expenditures and savings. This helps them to have an efficient expense management mechanism and fulfill their financial goals.
Financial Planning Objectives and Benefits
Financial planning ensures that right amount of funds is available to the investor to achieve his financial goals. This also keeps the investors aware of his current situation and helps in projecting his future needs through financial goals – whether he would be able to achieve them or not!
Therefore, advanced information, available through financial planning, helps them to take corrective actions such as:
- Review and distinguish between their need and desires, what is required now and what could be postponed further
- Improve annual savings by cutting down unnecessary expenses, or taking up additional part-time job or encouraging spouse to take up a job to meet demanding and increasing financial goals.
Financial Planning at Different Stages of Life
- Childhood
During childhood, an individual is dependent on the earning members of his/her family. The potential sources of income during this phase is pocket money, cash prize or any kind of scholarship. It is imperative for guardians to cultivate good saving habits in children at this stage. Values inculcated during childhood stay forever with an individual and help in developing a balanced and prudent outlook towards money.
- Unmarried Young Adults
This phase marks the beginning of earning years, where one either enters the work force or starts a business. Budgeting is one critical financial skill one should learn at this stage. Since, this age marks the inception of regular income, it is natural to go haywire and spend it recklessly. But, for a financially secure future for yourself and your family, it is imperative to save and invest judiciously in this phase.
SIPs and whole-life insurance plans serve great ways to force young unmarried into the habit of regular savings, rather than developing “living the lavish way” habit.
This is the best age to invest in equity. All personal goals, like marriage, buying car or home determine liquidity needs. Depending on the liquidity needs, the equity portfolio size is determined.
- Married Young Adults
This phase requires restructuring of your financial plan as you take up more responsibilities in life through marriage associations. Till now, you would have learnt to budget your income and save accordingly. Investment in various financial instruments such as equities, mutual funds etc would have also generated decent returns. If there aren’t any necessary expenses post-wedding, it is advisable to remain invested for a long term.
Life insurance and real estate planning should be included in your financial plan at this stage. Insurance policies are vital because they secure your savings from any mishappening.
Investment oriented towards your retirement should also be an intrinsic part of your financial plan. Good investment decisions at this phase of life will ensure that you don’t face any financial crunch at later stages in life.
- Married Individual with Children
This phase requires restructuring of your financial plan as you take up more responsibilities in life through marriage associations. Till now, you would have learnt to budget your income and save accordingly. Investment in various financial instruments such as equities, mutual funds etc would have also generated decent returns. If there aren’t any necessary expenses post-wedding, it is advisable to remain invested for a long term.
Life insurance and real estate planning should be included in your financial plan at this stage. Insurance policies are vital because they secure your savings from any mis-happening. Further, starting a health insurance policy earlier and not having to make claim against it for few years, is the best antidote to the possibility of insurance companies rejecting future insurance claims/coverage on account of what is called “pre-existing illness”.
While buying an insurance policy, it has to be taken care that it is a cashless policy i.e. a policy where the company directly pays for the hospitalization charges. In other policies, the policy holder has to bear the expenses incurred and claim reimbursement from the insurer.
All family members should be aware of what is covered in the policy and should be also aware of black listed health services provider. They should also know the documentation required to recover money from the insurer. Therefore these days many insurance companies have outsourced the claim settlement process. Investment oriented towards your retirement should also be an intrinsic part of your financial plan. Good investment decisions at this phase of life will ensure that you don’t face any financial crunch at later stages in life.
- Pre-retirement
At this stage, an individual should focus on paying off all his/her debts from home loans,education loan for children, etc. This is important as debt shouldn’t be a part of your finances after retirement , because it will eat away your limited income.
New investment avenues with high risk should be avoided at this phase of life as market fluctuations might not be in your favour and you may lose a fraction of your corpus.
At this stage, one’s entire focus should be on retirement planning and how you are going to manage your financial needs.
- Post-retirement
Till now, an individual has accumulated enough wealth through savings and returns from various investments. The main focus at this stage is to create a plan that takes into account daily expenses as well as your recreational expenses.
If one starts investing early in life, the possibility of facing a financial crunch later in life is miniscule. All that is needed is a rigid financial plan that caters to every phase of your life and the related expenses. Implementation of profit optimisation strategies and clear idea of your financial goals will help you in the long run.