What is Financial Planning?
The Financial Planning Process
Step 1: Determine Your Current Financial Situation
This step is like taking a snapshot of where you are now with your money. You’ll look at how much money is coming in (your income) and how much is going out (your expenses).
It helps you understand your spending habits and where you might be able to save.
You’ll also figure out what you own (like your car or house) and what you owe (like student loans or credit card debt). It’s like making a list of all your financial pieces.
Example: Getting Started with Financial Snapshot
Meet Priya, a recent college graduate who wants to take control of her finances. Priya decides to take the first step in financial planning by determining her current financial situation.
Priya starts by listing all sources of income, including her part-time job and freelance work. She also gathers information about her expenses, such as rent, groceries, and entertainment. After tallying up the numbers, Priya realises that she’s spending a bit too much on eating out and impulse purchases.
To get a complete picture, Priya also lists her assets, like her savings account and a second-hand scooter she owns. On the other hand, she notes down her student loan and credit card debt.
By taking this snapshot, Priya gains insights into her financial standing. She now knows where her money is coming from, where it’s going, and what she owes. This information will serve as the foundation for the rest of her financial planning journey.
Step 2: Develop Your Financial Goals
Think about your dreams – both short-term and long-term. Short-term goals might include buying a new gadget or taking a vacation. Long-term goals could be buying a home, paying for your child’s education, or retiring comfortably.
These goals give you direction and purpose for your financial decisions. They’re like stars guiding your financial journey.
Example: Setting Personal Financial Goals
Meet Raj, a young professional who wants to make the most of his hard-earned money. As Raj starts his journey of financial planning, he focuses on the second step – developing his financial goals.
Raj sits down with a pen and paper and starts thinking about his dreams. He jots down both short-term and long-term goals. Short-term goals include buying the latest smartphone and going to the mountains with his friends. Long-term goals, on the other hand, involve owning a house and saving for his future children’s education.
As Raj looks at his list of goals, he realises that they’re like guiding lights. These goals give him a sense of direction and purpose. They remind him why he’s working hard and saving diligently. With these goals in mind, Raj is more motivated to make smart financial decisions that align with his dreams.
Step 3: Identify Alternative Courses Of Action
Imagine you’re planning a trip – you’d consider different routes, right? Similarly, for each financial goal, brainstorm ways to reach it. Want to save for a vacation?
You might consider working overtime, freelancing, or cutting down on dining out. These are like paths you can take to reach your goals.
Example: Exploring Financial Paths
Imagine Meera, a young professional who is determined to save for her dream vacation. Meera dives into the financial planning process and reaches the third step – identifying alternative courses of action.
Meera imagines this step as planning a road trip. When you’re planning a trip, you think about different routes to reach your destination. Similarly, Meera thinks about other ways to get her financial goal of saving for a vacation.
She considers taking up freelancing gigs in her spare time, or even cutting down on her weekend outings. Each of these options is like a different path she could take to reach her goal. Meera realises that there are several routes to her dream vacation – she just needs to pick the one that suits her best.
Step 4: Evaluate Your Alternatives
Example: Weighing the Options
Meet Alok, who is determined to make a wise decision about his money. As he follows the financial planning process, Alok reaches the fourth step – evaluating his alternatives.
Imagine this step as comparing two job offers. Alok knows that when you have options, you need to carefully think about the good and not-so-good things about each one. He’s considering investing some of his savings to grow his money.
Alok puts on his decision-making hat and starts listing the advantages and disadvantages of investing. He knows that investing could help his money grow faster, but there’s also a chance of losing some of it. By evaluating these pros and cons, Alok will be able to make an informed choice that suits his comfort level and goals.
Step 5: Create And Implement Your Financial Action Plan
Imagine your financial plan as a treasure map. It lays out the steps you need to take to reach your goals. You’ll set specific tasks, like saving a certain amount each month or opening a retirement account. And then, you follow through with these tasks.
It’s like following the map to find the treasure – in this case, your financial goals.
Example: Crafting a Financial Roadmap
Imagine Anjali, a young professional who is determined to achieve her financial dreams. Anjali has reached the fifth step of financial planning – creating and implementing her financial action plan.
Anjali pictures this step as making a map for a journey. Just like you’d map out the route and landmarks, she’s creating a map for her financial journey. Her map is her financial action plan, detailing the steps she needs to take to reach her goals.
Anjali knows she wants to save for a down payment on a house. So, she sets specific tasks on her financial map – saving a certain amount from each salary, cutting down on unnecessary expenses, and exploring potential side gigs. By following this map, Anjali will be on track to find her treasure: her dream home.
Step 6: Review And Revise Your Plan
Example: Adapting to Life's Changes
Meet Neha, who understands the importance of staying flexible with her finances. Neha is at the sixth step of financial planning – reviewing and revising her plan.
Neha visualises this step as keeping her car on the right path during a road trip. Just as you’d check your map and adjust your route if you encounter detours, she’s doing the same with her financial plan. Life is full of changes, and so are her finances.
Neha takes a close look at her financial plan and compares it to her current situation. She recently got a promotion at work, which means her income has increased. She also had unexpected medical expenses that required dipping into her emergency fund. Neha realises that her plan needs adjustments to accommodate these changes. By reviewing and revising her plan, she ensures she’s on the right financial track.
Final Words
Financial planning isn’t about complex number crunchings or jargon – it’s about being the captain of your financial ship.
By following these steps – understanding where you stand, setting goals, exploring options, making correct choices, creating a plan, and staying adaptable – you’re well on your way to mastering your finances.
Remember, this journey is about taking control, making informed choices, and steering towards a brighter financial future. Start now, and watch your financial dreams become a reality, one step at a time.