Financial Planning - Definition, Types & Benefits | SBI Life
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Financial Planning - Definition, Types & Benefits | SBI Life

Insurance Basics & Financial Advice As aspiring individuals, all of us have a certain set of goals. Goals can be classified as short-term and long-term. Those that can be achieved under 3 years can be classified as short-term goals. On the other hand, goals that need 5 years or more to accomplish are classified as long-term goals. No matter the goals, you need a financial plan to make them a reality.

Financial Planning - Definition, Types & Benefits | SBI Life

8 Minute |

Financial Planning

What is Financial Planning?

As aspiring individuals, all of us have a certain set of goals. Goals can be classified as short-term and long-term. Those that can be achieved under 3 years can be classified as short-term goals. On the other hand, goals that need 5 years or more to accomplish are classified as long-term goals. No matter the goals, you need a financial plan to make them a reality.
So what is financial planning?
A process that can help you in managing and capitalising your money to meet your goals is known as financial planning. It helps evaluate your current financial situation, understand future goals and create a strategy to achieve them.
Financial Planning is not a one-size-fits-all system. It is a definitive plan that analyses your needs and financial situation to fulfil your future needs. Do keep in mind to understand your risk appetite when devising a financial plan, as it can help you make an informed decision.

What Budget Do You Need for Financial Planning?

Financial planning and financial literacy go hand in hand. Before you make a financial plan, you will have to understand the finer aspects of it. One of them is a financial budget.
A budget is a tool that can help estimate your income and expenses.
Creating a financial budget starts with identifying what your guaranteed income is. This can be your monthly in-hand salary. This will give you an idea of how much money you have in hand to spend. Any passive income other than this is considered an additional benefit.
Next, choose a personal financial plan method. There are many methods like paying yourself first, cash-only budget, the 50/30/20 rule, etc.
No matter which method you choose, you should first bifurcate your spending into three categories: Needs, Savings, and Wants.
Needs: Make a checklist of all your necessary spending. This should include paying for your utility bills, groceries, education of your children, and debt repayments (if you have any).
Savings: This is the capital that you invest in various financial tools for your future. One can save as per their risk appetite and income needs in insurance (life and medical), mutual funds, fixed deposits, etc.
Wants: Wants here can be classified as desires. This is the extra amount of money you spend to make your life more enjoyable. This can include going to the movies or eating out, shopping sprees, etc.
You can use the 50/30/20 rule here. However, it is completely your prerogative how much you would want to segregate your funds under the savings and wants section.
This is where financial literacy plays an important part. Financial literacy is the ability to understand and implement financial skills. This will include financial planning, financial budgeting and money management.
Creating a financial budget on paper may seem easy. Adhering to it is the difficult part. However, if you are able to manage your money wisely, it can help gain financial immunity.

Benefits of Financial Planning

What financial planning benefits should you know about? These include:

  • Emergency Planning: One of the biggest financial planning benefits is creating an emergency fund. It is known to everyone that an emergency can strike at any time. Financial plans help create an emergency fund that can be used during a crisis. An emergency fund is an alternative to use instead of using your savings. Ideally, you must invest at least six months of expenses in an emergency fund.
  • Meeting Life Goals: Our defined goals may change as per the different stages of life. A financial plan can aid in allocating funds to the right tool to help meet time-bound goals.
  • Financial growth: Financial plans are not just about investing money and minding expenses. A robust financial plan will help in financial growth and help grow your money.
  • Financial Security: One of the financial planning benefits is financial security. When you invest wisely, you know you have enough resources when needed without dipping into your savings. This comes in handy during your retirement when the constant flow of income from a job has ended.
  • Financial Immunity: Can financial planning help in gaining financial immunity? Yes. While you create a goal-based financial plan, you are starting your investment journey. This is not just creating a financially secure future for yourself but also leaving a financial legacy for your family, which can be life insurance.

Different Types of Financial Planning

To achieve financial immunity, you must understand the different financial planning types:

Tax planning:

Tax applies to your income over the pre-decided income slab. Financial planning can aid and complement tax planning. You can invest in tax-saving schemes such as PPF, ELSS, NPS, etc.

Retirement planning:

You will need a constant flow of income to enjoy a stress-free retirement. This is only possible if you plan your retirement well in advance. Retirement plans can help build a commendable corpus where you can live comfortably without compromising expenses. You can also attain financial immunity with a retirement plan.

Estate planning:

All worldly belongings are handed over to your family after your passing. This is only possible with proper estate planning. Estate planning is a type of financial plan that helps in the smooth transition of this process. This is also the stage where you make a will to distribute your assets among your loved ones without disagreements.

Financial Planning for Education:

As parents, planning for your children’s higher education expenses is crucial. While the cost of education keeps rising, this can be tackled and managed with ease by creating a comprehensive financial plan for education for your kids.

Investment planning:

A financial plan is not just about saving. It is also about growing your money with time. This type of financial plan is called investment planning. Multiple strategies and tools available in the market can be used for investing. These include mutual funds, investment in equity, ELSS, PPF, etc.

Insurance planning:

Money is the last thing you think about when an exigency strikes. Health or life insurance can reduce the burden of financial dependency in such moments. Insurance planning can help you identify the type of insurance you need as well as the benefits it can provide.

Budgeting:

For any financial plan to succeed, you will have to analyse your income and expenses. This process is known as budgeting. Based on this, you can create a financial plan to suit your future goals and needs.

How to create a Financial Plan?

You know that you will need a financial plan to secure your future. The question here is how do you create a financial plan?

Set your Financial Goals:

Financial goals are the objectives you want to realise over the course of your future. This can be buying a house in the next 5 years, creating a corpus for your child’s high education, and a retirement fund for yourself.

Maintain cash flow:

You will have to predict and maintain your cash flow to create your financial plan. This means keeping track of your budget and maintaining it. Do remember to review your cash flow periodically to make any changes.

Make paths to achieving each of your financial goals:

A financial plan is only successful if you are able to realise and fulfil your goals. You will need to create a path to make that happen. This can include investing regularly and diligently, managing your risk appetite with your investments, allocating funds to the right tools, and managing expenses.

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