What is Financial Planning?
Life by itself is compared a vehile, you are the driver of the vehicle and the objective of the vehicle is to smoothly reach various destinations known as Life Goals. Financial Planning is the process of developing a personal roadmap for your financial well being considering various aspects such as your income, your assets, liabilites, your risk appetite, taxation, etc.
The output of the financial planning process is a personal financial plan that maximizes your basic resource, money to achieve your goals, in the best possible manner, over the time period required to achieve your goals, while taking into account the twin villians on the road, namely, inlflation and taxes.
In short, financial planning is the process of systematically planning your finances towards achieving your short-term and long-term life goals.
Right through time, ambition has ruled the world, whether it was to conquer to conquer the earth or the sky. Most of us humans nurture dreams and ambitions of owning a bigger house or the latest car in the market, the latest gizmos in the technology world, exploring the world, giving our children the best possible education, a blissful and happy retirement, etc. Basically, these dreams and ambitions are our lifestyle goals.
Consider this example
Mr and Mrs Shah, aged 35 and 32 respectively, have a three year old daughter. Both are working parents. Mr Shah works in a multinational company and Mrs Shah is a teacher in a primary school near their house. Mr Shah plans to retire at the age of 55 since he feels that he will not be able to keep up with the stressful life in Mumbai. The Shah’s as a family also nurtures the dream of moving from their current one bedroom rented suburban Mumbai apartment, to their own two bedroom apartment costing around Rs 25 lakh within the next 5 years to a city close to Mumbai, preferably Pune or Vapi in Gujarat. The Shahs own a small family car, for which they have availed of a loan of Rs 3 lacs and hope to buy a new bigger car in the next 5 years once they move into their new home. Today, realizing that education being a very expensive affair, Mr Shah, reckons that he will need Rs 15 lakh at today’s prevailing for his daughter’s higher education 15 years later. He also wants to build a corpus of Rs 5 Crore for his retirement after 20 years to maintain his current standard of living.
While distinguishing between short term goals and long term goals, you must keep in mind that, as a general rule, any life goal that needs to be met within 3 to 5 years can be considered as a short term goal. Beyond that, any other goal can be classified as a long term goal. By this classification, the Shah’s goals can be classified as follows:
|Short Term Goals
|Long Term Goals
|2 BHK apartment
|Daughter’s Higher Education
|Buying A bigger Car
Using a similar yardstick, you may classify your own life goals. Each of them needs financing over a period. How you plan your finances, depending upon the period of the goal and to have the right amount at your disposal at the right time, is what financial planning is about.