Basic concepts you need to understand for financial planning

Life is an endless chain of actions that you undertake daily. Yet, one thing is certain, most of these actions are directed towards your goal of achieving financial freedom; a life where you have enough money to cover all of your current expenses and ensure the remaining amount is adequate to cover your future expenses as well. Owing to the ever-increasing costs, there is a high probability that the amount you save can fall short after your retirement, leading to a financial crisis at a time when you won’t have a regular source of income. In such cases, borrowing to cover your expenses can push you towards a debt trap.

The thought of your life’s hard work to save money can fail may seem terrifying, but it is never a lost cause. Almost everyone who has sorted their finances owes their success to a comprehensive financial plan. What to do, when to do, how much to invest, and where: everything is listed down and followed to ensure you attain a burden-free financial future.

However, as the market costs are ever-fluctuating and your priorities may change in the future, a financial plan should be made with utmost caution. If you have just started to earn or want to set your finances in order, you must understand the following financial planning concepts to make an effective financial plan.

What is Financial Planning?

It is the process of planning your investments and assets to help them attain their financial goals, keeping in mind your risk profile. Financial planning lists the goals you want to achieve and allows you to set in motion the investments you have to make to achieve them. For example, you may want to purchase a house after 5 years, for which you may need Rs 50 lakhs. To save Rs. 50 lakhs for the house, effective financial planning would detail how much you should invest and in which asset class to ensure that you have the amount in 5 years.

How to do smart financial planning?

Smart financial planning can make or break your finance plans. Therefore, it is important that the process is efficient, effective, and backed by tried and true strategies.

Set Financial Goals: This is the entire basis of financial planning. Whether you are saving for a medical emergency or a big event such as marriage, your investment goals should be specific. They should offer expected returns within the given time frame. And most importantly, they should be realistic and achievable considering the current market and economy.

Invest your savings: Financial planning introduces the habit of investing. You should consider investing your savings in different asset classes such as mutual funds, equities, etc., for capital appreciation. Once you start investing, you will start experiencing the power of compounding and value appreciation.

Diversify: No investment is safe from the ups and downs of the market and the economy. You can consider the following factors to ensure that you diversify your investments:

  • To get assured returns and liquidity for emergencies, invest in the money market, debt instruments, corporate FDs, and fixed deposits.
  • For aggressive returns, investing in stocks is recommended. You can reduce the risk through investment in equity mutual funds.

Hedge risk with insurance: Life is uncertain, and any unfortunate incidents might leave your loved ones without a breadwinner. To ensure that they do not suffer from financial struggles in your absence, an insurance policy is essential. You can choose from a variety of insurance plans such as life insurance plans, term insurance plans, health insurance plans, etc.

Be consistent: Compounding acts as a powerful force in the world of investment. To make the best of it, start investing early, and save regularly. Only then can you build a great portfolio that helps you achieve all of your financial goals.

Who needs a financial plan?

If you can relate to the following factors, you need a financial plan:

  • You are a salaried individual with no other source of passive income.
  • You are the only breadwinner of the family with several dependents.
  • Your family has a history of chronic illnesses which can result in high medical costs.
  • You don’t have a hefty amount saved in your bank account.
  • You don’t consistently invest in the financial market.
  • You have several financial goals you want to fulfill.
  • You don’t have a retirement plan.

Financial planning concepts dictate that if you belong to any or multiple of the above categories, you should understand the basics of financial planning to set a financial plan in motion.

The benefits of financial planning

With an expansion in the number and complexity of financial products juxtaposed with a plethora of information available at the fingertips due to the advent of technology, it has become increasingly crucial to pick up the right investment instruments. You can then develop an appropriate roadmap capable of fulfilling your financial needs and securing your financial future. If done right, the basics of financial planning can provide you with the following benefits:

  • Financial goal fulfillment: Financial planning enables you to create a step-by-step plan to fulfill your financial goals. Irrespective of the market scenario, a person can stick to the plan to ensure it creates a financial bubble against uncertain events.
  • The flexibility of actions: A financial plan made after learning the financial planning concepts provides flexibility to review and change the internal factors to ensure it is on the right path. Such plans, when regularly monitored, enable quick reallocation of funds to meet any deficits towards goal fulfillment. At the same time, any surpluses generated can be gainfully redirected to appropriate investment channels.
  • Market conditions: Financial planning helps you make the most of the market conditions and turn them to your advantage.

How to select a financial planner?

One of the concepts of financial planning includes the adage ‘Better safe than sorry.’ For something as critical as financial planning, it is always wise to consult a financial planner if you think the basics of financial planning are complex. If you plan on hiring a financial planner, you should consider the following factors:

  • The company must be experienced in the field of offering financial services.
  • It must employ a host of financial experts.
  • The company must be well known for making successful financial plans.
  • The financial experts, when consulted, should be patient enough to analyze your financial situation and create a customized financial plan.

FP360: The industry-best financial plan by IIFL

FP360° is a unique all-in-one platform designed by leading financial experts at IIFL. The platform leverages cutting-edge technology and disruptive research-backed products to create a dynamic financial plan for you that includes diverse solutions such as:

  • Goal-based Investment Planning
  • Insurance and Tax Planning
  • Will & Estate Planning
  • Liability Management
  • Portfolio & Statement Analysis
  • Annual Review of Financial Plan
  • Access to Research & Reports
  • Invites to Knowledge Seminars by Industry Experts
  • Private Equity & Venture Capital Funds
  • Advisory on Real Estate Other Financial Solutions

Irrespective of the plan you choose, FP360° makes financial planning easy and convenient. With no separate brokerage or distribution charges and no Demat AMC, FP360° is transparent and economical. IIFL only charges a fixed percentage of applicable advisory fees linked to the size of assets under management within regulatory limits.

These basics of financial planning will allow you to create an ideal financial plan or pitch your idea of a financial plan to your financial consultant. Now is the time to prioritize financial planning and take every step forward to witness all of your financial plans fulfilled.

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Frequently Asked Questions Expand All

The steps you must undertake for creating a financial plan are:

  • Define your financial goals
  • Review your current financial situation
  • Make an investment budget
  • Consult a financial advisor
  • Choose ideal investment tools
  • Review and rectify your financial plan regularly

A good financial plan is one that considers your investment budget and allows you to achieve your financial goals within the given time period. A successful financial plan does not create a financial burden but eases your finances in time.