Financial Planning
We know Financial inclusion, Financial Advisory, Financial planning, Financial planner, Financial literacy are the catch words today. And all the financial product manufacturers, bankers, websites, etc. are now getting into all of these in some form or the other. It is a great sales pitch. Financial planning is not about tweaking your questions so that you make the client end up buying some product or a specific product that you have targets for. Financial planning is a detailed process where the client (jointly if married) and the planner need to spend time together to understand the financial health.
What is Financial Planning?
Financial Planning is the process of meeting your life goals through the proper management of your finances. Life goals can include buying a house, saving for your child's higher education or planning for retirement. The Financial Planning Process is generally a six step process that helps you take a 'big picture' look at where you are currently.
Step 1: Setting goals with the client:-This step (that is usually performed in conjunction with Step 2) is meant to identify where the client wants to go in terms of his finances and life.
Step 2: Gathering relevant information on the client: - This would include the qualitative and quantitative aspects of the client's financial and relevant non-financial situation.
Step 3: Analyzing the information:- The information gathered is analysed so that the client's situation is properly understood. This includes determining whether there are sufficient resources to reach the client's goals and what those resources are.
Step 4: Constructing a financial plan:- Based on the understanding of what the client wants in the future and his current financial status, a roadmap to the client goals is drawn to facilitate the achievements of those goals.
Step 5: Implementing the strategies in the plan:- Guided by the financial plan, the strategies outlined in the plan are implemented using the resources allocated for the purpose.
Step 6: Monitoring implementation and reviewing the plan:- The implementation process is closely monitored to ensure it stays in alignment to the client's goals. Periodic reviews are undertaken to check for misalignment and changes in the client's situation. If there is any significant change to the client's situation, the strategies and goals in the financial plan are revised accordingly.
Using these six steps, you can work out where you are now, what you may need in the future and what you must do to reach your goals.
The Benefits of Financial Planning
- Financial Planning provides direction and meaning to your financial decisions.
- It allows you to understand how each financial decision you make affects other areas of your finances.
- By viewing each financial decision as part of the whole, you can consider its short and long-term effects on your life goals.
- You can also adapt more easily to life changes and feel more secure that your goals are on track.
Common Mistakes in Financial Planning Approach
The following are some of the common mistakes made by consumers in their approach towards Financial Planning:
- Don't set measurable goals.
- Make a financial decision without understanding its affect on other financial issues.
- Confuse Financial Planning with investing.
- Neglect to re-evaluate their Financial Plan periodically.
- Think that Financial Planning is only for the wealthy.
- Think that Financial Planning is for when they get older.
- Think that Financial Planning is the same as retirement planning.
- Wait until a money crisis to begin Financial Planning.
- Expect unrealistic returns on investments.
- Think that using a Financial Planner means losing control.
- Believe that Financial Planning is primarily tax planning.
