|
Financial Planning is a means of achieving financial goals through careful management of resources. It helps you figure out goals and how to meet them. It encourages you to save money to invest. Determining the financial resources available and utilizing them wisely will enable you to prepare for changes and handle unforeseen events.
Six Key Steps of Financial Planning:
Set Goals
The first step in financial planning is that you need to establish definite financial goals. Lay down concrete goals that will encourage you to realize your financial needs. For that, you must first determine your financial situation and based on that you can establish future goals. This includes setting a time frame for results and a savings plan that complies with your goals.
You have to be spot-on while setting goals. Ill-conceived and hastily crafted goals cause more damage than good. If goals are wide off the mark or can be achieved effortlessly, then accomplishing them will not be very beneficial. On the other hand, goals that are virtually unattainable, will lead to failure and despair.
Make a check-list of things you have always sought, and rank them according to priority. In all probability, you will discover that you have some short-range goals and some long-range goals to which you can assign precise deadlines.
In general Goals should be:
Specific:They should be clearly spelt out and not be ambiguous. “I require $750,000 on retirement” is a specific goal whereas “I want to be well off when I retire” is just plain vague.
Measurable:Set quantifiable goals that will let you know when you have accomplished your targets.
Practical and possible:Formulate reasonable goals that can be attainable. You should have realistic expectations.
Time bound: Goals should have a time limit so that progress can be monitored.
Collate dataThe second step is to evaluate your financial resources. Prepare a methodical list of all your assets and liabilities. A detailed inventory of your assets will help determine their value and the income they generate. A list of liabilities would reveal to whom and how much you owe, the rate of interest and collateral. Arrive at your present net worth by deducting your debts from your assets.
All relevant data regarding income and expenses should be monitored and collated to help draw up a cash flow statement. Gather bank statements, tax returns, insurance policies, real-estate documents and other related financial data. All this will help determine where you stand financially.
Analyze the dataThe next step would be to analyze and assess your financial position to find out a course of action. This involves studying net worth and cash flow statements, insurance coverage, taxation and investments.
As a result, deficits or surpluses can be identified, in addition to the areas that need to be fine-tuned. Develop a budget that will help augment your resources or cut down your expenses in order that you have the means to invest in your goals.
Create a planBased on the data presented, a financial plan can be worked out to utilize the resources. Create a plan designed to help meet your aims and obligations, future expenses and deadlines. Develop economic projections for your plans. Issues such as widening your investment base, tax reduction, debt consolidation, curtailing expenses may require making changes in the plan.
Weigh each financial decision carefully as it may impact other areas.
Implement the plan
Once you have visualized and established goals and developed a plan to meet them, it is now time to put the plan into effect. This is a crucial step as everything hinges on how successfully the plan is executed.
Activate your plan to achieve your desired short-term and long-term goals. Implementation may require revising allocation of assets.
Inspect each constituent of the plan such as investing, risk management, and tax strategy and work to carry forward the plan.
Monitor the plan
This involves periodically reviewing the plan to ensure that you are heading in the right direction. The plan should be checked against goals and any deviations should be promptly dealt with. It also calls for making necessary adjustments to take into account changes in life and current circumstances; otherwise, the plan will become out-dated.
Changes such as spiraling costs, decreasing yields, tax laws, economic scenario and life events affect your financial plan. Revise your plan from time to time to reflect these changes such as increasing the time frame or cut down expenditure.
Thus, financial planning helps maximize wealth and ensures a financially secure future through the judicious management of assets
|
