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Understanding Financial Planning in India: History and Importance
A financial plan is a sequential procedure concerned with the complete assessment of a person’s present monetary status. This helps one to achieve their targeted short-term or long-term goal in the future. It uses variables to foresee asset values, future income, and withdrawal plans.
Preparing a financial plan is essential since it enables you to utilise your assets properly and boosts your confidence to tackle any problems. To learn more, keep reading.
What Is the Definition of Financial Planning?
Financial planning is a holistic strategy that helps you achieve your monetary or personal goal by accurately determining your prevailing and future financial status. Thus, it enables you to accomplish your goals systematically. Financial planning involves planning expenses, investing in profitable assets, choosing the correct asset allocation, making a retirement plan, and so on.
As stated earlier, it is a road map that assists you in dealing efficiently with your day-to-day expenses and anticipated future expenditures. However, before you make a monetary plan, hire a professional financial planner who can guide you to ensure the flawlessness of your funding strategy.
History of Financial Planning in India
After the independence of India, on the 15th of March 1950, the Planning Commission was founded under the Chairmanship of the then Prime Minister Jawaharlal Nehru. Subsequently, the Planning Commission was replaced by NITI Aayog in 2015, which is chaired by Prime Minister Narendra Modi.
Among the various functions performed by this establishment, the primary one is to evaluate India’s economic condition and accordingly formulate financial planning for the country based on different goals for the overall development of the nation.
What Are the Components of Financial Planning?
There are eight components of good financial planning as stated below:
- Financial goals
- Budget planning and cash flow planning
- Net-worth statement
- Retirement plan
- Insurance coverage
- Estate plan
- Emergency funds
- Debt management plan
How to Conduct Financial Planning in India?
Step 1: Determine Your Financial Position
The initial step of financial planning is to figure out your financial position. During this stage, you have to assess your financial status to understand where you should start. Additionally, it will also help you to determine whether you can afford to meet the set goal or not.Step 2: Determine Risk Profile
Everyone has a different risk profile. Several individuals have a mindset of taking risks, while others try to avoid them as far as possible. Assessing your ability to take risks will exhibit your investment portfolio alongside the amount of debt you can afford.Step 3: Set Financial Goals
After determining your risk profile and checking your financial situation, you can begin setting your investment goals. However, before choosing the type of goal, be specific, realistic, and honest with your decision. Depending upon the nature of the goal, it can be divided into three categories, as shown below:
- Short-Term Goals: In this type of plan, goals are achieved by an individual within a short time. Usually, short-term plans range between 6 months and 5 years. This type of goal comprises forming a monthly budget, paying off credit card dues, creating an emergency fund, etc.
- Medium-Term Goals: Secondly, medium-term goals refer to those that comprise investments in purchasing a new car, forming an investment portfolio, saving for marriage, etc. In general, the tenure for medium-term goals ranges between 5 years and 10 years.
- Long-Term Goals: Thirdly, long-term goals refer to those goals that require a long time for an individual to achieve. For example, owning a house, saving for a retirement fund, etc. The time limit for long-term goals is beyond 10 years.
Step 4: Keep an Emergency Fund
Having a financial plan is an ideal way to meet your future goals. However, this journey from making the plan to achieving the goal is not very simple since you have to come across various challenges during the course. For this, you can save some amount of money as a contingency. If your car breaks down, you lose your job or experience a medical crisis, you can use this emergency fund to counter the situation instead of panicking.
While making your financial plan, preserving 6 to 12 months’ worth of expenses in your emergency fund is sensible. This reserve will give you sufficient time to recover your monetary status after it collapses.
Step 5: Implement Your Financial Plan
Executing your plan is the second last step of your financial planning. Forming a well-ordered plan and implementing it can seem to be challenging. For this, taking assistance from a certified financial planner is recommended. Remember that immense attentiveness is required while you execute your financial plan. It will require your utmost dedication to carry out the planned actions.
Furthermore, remember that with any delay you make in implementing your plan, your targeted goal will move further away. Hence you should stick to your schedule and consult your financial advisor whenever necessary.
Step 6: Review and Revise
The concluding step for a financial plan is the analysis and review of the plan. Remember that while planning is rather easy, executing plans seamlessly and keeping them relevant is fairly challenging. This needs you to review your plan and evaluate its success after its implementation from time to time.
It is essential to note that the socioeconomic world is continually changing. Thus, whenever you figure out any discrepancy in your financial plan due to the global economy, make the required changes. In addition, become self-dependent and avoid trusting your financial planner too much, as they are also humans and can make mistakes. Hence you should review your plan regularly and modify it whenever required.
Why Is Financial Planning Important?
Financial Planning is a process of formulating objectives, programmes, and budgets regarding the investments of an individual in order to achieve a future monetary goal. Mentioned below is the importance of financial planning in India:
- Financial planning maintains a proper balance between the inflow and outflow of funds in order to retain monetary stability.
- A sound financial plan lessens risks and uncertainties regarding market fluctuations.
- Financial planning ensures the adequate use of financial resources to get the best returns on investment.
- Financial planning enables an individual to be prepared to face emergency situations.
- A well-organised financial plan helps to choose the right instruments for insurance coverage as well as investment.
- Financial planning also promotes better tax planning and compliance while saving money.
Now that you have understood financial planning in India, you can just set your goals and make your plan efficiently. However, remember that maintaining a monetary plan can be hectic if you take the entire responsibility on yourself. For this, you can hire a specialised financial planner or advisor to take expert assistance from them.
FAQs on An Ultimate Guide to Financial Planning in India
Is there any particular time for financial planning?
How are financial planning and financial management related to each other?
What are the key suggestions for proper budgeting?
Mentioned below are some important suggestions to make an effective budget:
- Make a plan to deal with unforeseen expenditures
- Review your budget periodically
- Be specific and have a clear objective
- Ensure that your budgeting procedure is easy and understandable
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Disclaimer
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