By Ranjeet S Mudholkar
Managing finances is an important aspect of the life of every working individual and to ensure that one is able to lead a life free from worries, it is important that it is done properly in a planned manner.
Adopting Financial Planning approach towards the management of finances may help the individual in attaining the financial goals. Financial Planning is the process of meeting various life goals of an individual through proper management of finances.
Financial Planning incorporates a comprehensive view of personal finances of an individual and covers all the areas of personal finance including Insurance Planning, Retirement Planning, Investment Planning Tax Planning and Estate Planning.
Many people do not have a clear idea about their life goals, as they fail to pay proper attention to these due to a long time left in the goals. Goals like retirement and children education look too far to be cared for at the early stages of life, which if ignored to a later date might become difficult to achieve.
Thus the primary function of a Financial Planning is to identify these goals with the help of a Financial Planner who can also help to put these goals in the measurable format which will make them clear. Financial Planning involves the analysis of these life goals and putting them in an order in terms of the financial commitments that need to be put towards them in terms of amount and timing.
Advantages of a Written Financial Plan
A well documented Financial Plan is a comprehensive document that contains and summarises all the information related to the personal finance landscape of the individual. It has several advantages over and above the normal orally delivered investment advisory, some of which are listed below.
1. Setting up the Priorities: One of the main advantages of a written Financial Plan is that one is able to set priorities in his/her life vis-a-vis the allocation of fund towards the goals.
2. Financial Discipline: Once a Financial Plan is drafted, one becomes aware of the financial position and the required allocation of monetary resources towards each of the identified goals in each period and the spending pattern is defined clearly as well. This instils a sense of discipline in the individual regarding management and uses of money.
3. Regular Monitoring: A written Financial Plan is monitored at regular intervals, thus giving the individual clear reflection of the financial position at different points in time. A Financial Plan review is the process of rebalancing the asset location due to changes in both market and personal situation of the individual.
4. Record Keeping: Since Financial Plan is a dynamic document, keeping the record at various points in time will give one reflection of his/her own financial position over a period of time. Important documents like Income tax returns, investment proof, property ownership documents are easily accessible when required.
5. Comprehensive Coverage: Since the Financial Plan is written after thorough analysis and deliberation, the chances of any particular area being avoided are very thin and even the areas which people have low focus on like retirement planning and Estate Planning are covered.
6. Tax Efficiency: A well documented Financial Plan shall ensure that one takes maximum advantages provided under the Income Tax Act, 1961 such as the ones under Section 80C, 80CCC, 80D, and Section 24, which give various deductions from the taxable income. act, thus buying a home on loan can be a recommendation of an efficient Financial Plan.
7. Planner Accountability: Since the financial position and the recommendations made by the planner are well documented in the written Financial Plan, it may serve as a tool to judge the efficacy of these recommendations and whether they are truly working in the interest of a client.
8. Management of Financial Contingencies: A written financial plan shall ensure that an individual is continuously updated about the vital parameters of his financial life i.e. income v/s expenditure statement and net worth statement and any financial contingency arising out of sudden events can be negotiated with efficiently.
9. Timely achievement of goals: Once the goals are established and the individual starts working in the direction of the same in consultation with his/her planner, it is likely that all the major financial goals like children education, children marriage, buying a house and saving for retirement are attained in a timely manner.
Thus it could be said if one gets a comprehensive Financial Plan drafted in consultation with an expert like a certified financial planner (CFP) professional, could get to lead a life which is free from financial worries, at the same time ensuring that one’s financial goals are identified and met, well in time.
Ranjeet S Mudholkar, is Vice Chairman and Chief Executive Officer, Financial Planning Standards Board India (FPSB India). The views expressed here are personal, and do not necessarily represent that of the organization.