Who Requires Financial Planning?

You must have often wondered as to what is the need of financial planning for individuals. One common question is who needs financial planning? Does it apply to everyone or is it only for certain age groups or certain income and wealth categories. The actual question should not be who needs financial planning but can one manage without financial planning. What makes financial planning so imperative. Let us get a perspective on the need of financial planning.

About Financial Planning

Remember the basic rule that financial planning is about managing your finances and directing your resources towards your medium and long term financial goals. Now this is what financial planning is all about and it is an iterative process. Financial planning gives a method to your financial activity and squeezes the maximum savings out of your income so as to ensure a solid financial future that is happy and prosperous.

The need of financial planning arises from financial goals. Anybody who has goals or dreams to achieve something in life needs to plan. For example, if you intend to have your own house in 3 years, a large car in 5 years, a content retirement after 25 years and also to send your kids to the best business schools and treat your spouse to the best foreign holidays; you jolly well need financial planning. To put the need of financial planning in better perspective, let us look at various stages and how financial planning fits in.

You are young and healthy; do you need a financial plan?

Yes you do, and all the more so. If you are in your mid-20s, just out of B-school, getting a good salary package with incentives thrown in; it is time to start planning. After all, everything in life requires self-generated, goal-oriented action plans and your money is no different. You are never too young to plan because by start early when you are young and earning well, you can put in more of your own wealth into your various goals and reduce the debt along the way.

You are a working adult, married with kids in school

Now you have responsibilities. You need plan, not only for your needs, but also for the needs of your spouse and kids. You may also have to support your parents and that has to be also provided for. Now you don’t have too much waiting time. Start your financial plan right away. At this stage, if you continue drift through life without carefully set goals and well-researched plans to achieve these goals, you are asking for trouble. This is the time your income levels will grow fast, so put it to maximum work.

Children are growing and you are in your forties

They call it the roaring forties, but you need to play this phase very carefully as it can make or break your financial future. This is the time to start planning the corpus for your children to study, seriously take a look at your retirement and ensure insurance is complete. Here your risk appetite is gradually reducing but you still need long term returns.

You are retired or just approaching retirement

Having hung your boots, do you still need financial planning. Yes, you do as you need to make the best of your retirement corpus and make it last as long as possible. You have hung up your boots and are planning to retire peacefully. But there is a thought nagging you at the back of your mind – how will you be financially stable without a source of income? The answer is to make a stress tested financial plan assuming the worst case scenario. Plan monitoring becomes a lot more critical at this stage.

Components of a Financial Plan

There are some important components to your financial plan as under.

  1. Your dreams and targets captured by your financial goals
  2. Your current wealth standing collated from your Net worth statement
  3. Your inflows and outflows based on your Budget and cash flow planning
  4. A clear plan to cut down on high cost debt to enhance value
  5. Long term plan to give a content retirement including planning for your children
  6. Emergency funds, you can fall back upon at short notice without touching investments
  7. You must be covered with insurance for life, health, assets and liabilities
  8. Have a will and an estate plan to make things smooth after you.

What is a Financial Planning? 

Financial Planning can be broadly defined as the process of estimating the capital required to meet your long term goals and determining the investment stepping stones to achieve these goals. Towards this end, you frame financial policies in relation to the specific procurement, investment and administration of funds and assets over a period of time.

Frequently Asked Questions Expand All

There is no hard and fast rule about age of starting financial planning, but the golden rule is the earlier the better. Ideally, as soon you start earning money, make a financial plan with adequate assumptions and build it along the way.

The better way to do it is to set a target savings first. If you decide to invest what is left after spending you will never save too much. Rather set your saving targets per month and then work backwards to see how you can squeeze the maximum savings.