This article is written by Shivani Garg, pursuing a Diploma in Business Laws for In House Counsels from Lawsikho.com.
Table of Contents
Introduction
Finances play a very crucial role in every person’s life from personal to professional so it becomes very important to have it all sorted before one set into something as it will decide what lies ahead in the future. Financial planning is important from both personal and the business aspect. Money speaks one language, “If you save me today, I’ll save you tomorrow”.
So, what exactly do you mean by financial planning?
In simplified terms, the process of financial planning should help you answer three questions. Where you are today, that is, your current personal balance sheet, where do you want to be tomorrow, that is, finances linked to your goals, and what you must do to get there, that is, the asset allocation and investment strategy that will help you achieve your objectives.
In other words, financial planning is a game just like football, but here the difference is that the goalposts are constantly changing. When it comes to business and its growth, one needs more than just to plan what one wants from the business. One needs to know how to plan for it. Developing a business plan is critical for the success of any organization.
Financial planning – Benefits
-
- Planning and investment: When it comes to starting a new venture or expanding the existing business at large scale or to build a new house or to buy some luxury car, every single thing needs money rolling. To get financial support for anything like that people usually turn up to investors or banks, whatever suits them. Before financing, banks/investors want to know if you can pay back the amount for which they come up with several questions.
Data from your plan can help determine whether you get the money you need or go hungry.
- Planning and investment: When it comes to starting a new venture or expanding the existing business at large scale or to build a new house or to buy some luxury car, every single thing needs money rolling. To get financial support for anything like that people usually turn up to investors or banks, whatever suits them. Before financing, banks/investors want to know if you can pay back the amount for which they come up with several questions.
- Acts as a source of great motivation and commitment: A financial plan reduces unreliability around monetary matters by providing transparency and indicates what you are expected to accomplish.
- It helps you set up goals: Goals are something that gives people direction and purpose in their lives. With a clear mindset and goal, individuals remain focused. Many businesses struggle through the first few years and rise to profitable success later on. Financial planning helps you to keep the end game in mind. It also helps you keep tracks on your money status along with the market. People must have S.M.A.R.T. goals towards everything.
S.M.A.R.T. Goals: Specific Measurable Attainable Realistic Timely.
- Sets performance standards: When you have a financial plan to measure against it allows for both self-improvement and self-evaluation.
- Improve financial outcomes: Those with a good financial plan are more likely to be prepared for financial emergencies and retirement. A proper plan helps people to pay attention to the future as well as the present.
- Financial planning has additional health and emotional benefits: With a clear plan, individuals are usually less stressed and tend to be more optimistic about the future which also leads to better health and emotional balance. When you have a plan in place, you are more likely to overcome any kind of setback.
- Financial plans furnish a guide for action and decision-making: A financial plan will guide you to pinpoint understandable actions to take in order to put yourself in the best financial position.
Why is personal financial planning crucial?
To achieve what 1% of the world’s population have (Financial Freedom), you must be willing to do what only 1% dare to do. Hard work and perseverance of highest order – Manoj Arora
The stability of the personal status of individuals and families is directly related to the stability of their financial condition. Apart from having financial freedom, there are various other reasons as to the importance of personal financial planning which I have stated below:’
- Future visibility: It gives assistance in visualizing finances for the next 10-20 years of your life.
- Family security: proper health insurance covered.
- Emergencies: There may be unexpected and unavoidable times ahead that could become obstacles before your finance goals. Proper financial planning allows you to be ready for such times without disturbing your primary objectives.
- Retirement planning: It helps to maintain your lifestyle through your working life and throughout retirement as well.
- It helps to determine short and long-term financial goals and then create a balanced plan to reach those goals.
- Financial understanding: When the measurable financial goals are established, the effects of financial decisions understood, and their results are reviewed, financial understanding could be achieved. It also gives a new perspective to budget, further, putting a control on financial lifestyle.
- Cash flow: financial planning increases your cash flows by monitoring the spending patterns and nature of expenses. Financial planning which includes careful budgeting and prudent spending would help you in keeping more of the hard-earned cash.
- Helps you identify financial errors.
- Improved ROI (rate of interest) on the portfolio: Proper financial planning takes into consideration several aspects such as risk management, investment planning, liquidity management, liability management and goal planning. It allows you to design your integrated investment plan which takes into consideration your goals, risk appetite and available liquidity hence helps to improve the ROI on your portfolio.
- Enhances risk management: With a proper financial planning, you could determine the insurance coverage you require with better certainty.
Budget Rule
Senator Elizabeth Warren popularized the so-called “50/20/30 budget rule” (sometimes labeled “50/30/20”) in her book, All Your Worth: The Ultimate Lifetime Money Plan. This budget rule came up with the straightforward plan so as to help out people to reach their financial goals, let it be long term or short term. The rule is demonstrated as what should be done when it comes to finances. In this 50/30/20 budget rule, 50-30-20 portions are indicated as: 50% for needs, 30% for wants and 20% in savings.
- Needs category (50) over here include rent or mortgage payments, groceries, health care, insurance, minimum of your debt payment, car payments and utilities. Basically, if you spend more than 50% on your needs, you must understand that ultimately it will either lead you to cut down on your wants or you will have to compromise on your lifestyle.
- Wants category (30) over here includes your lifestyle. The expenditure that is done on things that are not essential yet you want for your leisure time, which includes vacation, dinner and movies, latest electronic gadgets etc. This part comes for the money spent on little extras for making life more entertaining and enjoyable.
- Then comes the savings and investment category (20) which includes putting money for an emergency fund in a bank savings account, investing in the stock market, and mutual funds.
How to create a successful financial plan?
Well, to create a life you want to live, you need to have courage to take calculated risk. There are few steps that can be followed to create a successful financial plan of your own which are mentioned below:
- Understanding your future: what is important to you?
- Where do we want to be? (Short-term, medium-term, long term; whichever you want to plan for)
- Next comes listening, questioning, and understanding.
- Determining your current financial situation with regard to income, savings, life expenses, and debts.
- Build a financial plan: what do you want out of life?
- Creating direction in life: managing risk, tax planning, lifestyle, estate, retirement etc.
- Making intelligent and realistic choices.
- Achieve your goals: what action do we need to take?
- Evaluate courses of action, considering your life situation, personal values and current economic conditions.
- Implementing the plan: monitoring and evaluating.
- Revise your plan.
- Are you on track? – Check out the changes so far!
Conclusion
I am sure nobody wants to get doomed at the end like Vijay Mallya, The King of Good Times. What happened with Kingfisher Airlines in 2011 seems like the finest example of vague financial planning to begin with and gives a clear idea of how much revenue targets (if already set in prior) need to be accomplished a time before things go way beyond hands.
Financial planning gives you a clear view of what the risks and prospects are before you launch any business. Further, the 50-30-20 rule intends to help individuals manage their after-tax income so that all the expenses are widely covered, money is saved for retirement and along with that at the same time doing what gives happiness. As financial planning is a very personal exercise, one needs to look towards its course of action. It is essential for both service people and businessmen apart from every individual. There are many financial planners and advisors out there with tremendous knowledge and experience to help people and business to deal with these matters so as to save one’s ship from sinking at the later stages of their lives.
“People make bad choices all the time, usually because of fundamental inability to operate over longer time frames.” – Charlie Munger
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:
