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The majority of us believe that the idea of financial planning is too complicated and technical to comprehend. We are prevented from understanding the crucial idea of financial planning and taking charge of our finances by this false notion. Trust me, when presented in an organized manner, the idea of financial planning is one that is easy to comprehend.
Financial planning is the act of evaluating and managing your financial resources to assist you in making plans for reaching your financial objectives and securing your financial future.
This clear definition will make it easier for you to understand the idea of financial planning. The term could be divided into two sections, Part A) evaluating and managing your financial resources, and Part B) creating a strategy for reaching your financial objectives, for easier comprehension.
Part A: Analyzing your financial resources entails determining how much money you make from several sources, such as salary, professional fees, business income, pension (for retirees), rental income, interest and dividend income, etc. While keeping track of your EXPENSES and SURPLUS is part of managing your financial resources. Your daily expenses, such as those for food, clothing, rent, utilities, loan payments, travel, entertainment, hobbies, and eating out, use up a portion of your income, leaving you with a surplus that you may use to save and invest for your long-term financial goals. The surplus must be planned to fulfill your financial objectives, and the expenses must be planned to accommodate your lifestyle needs.
The second portion of the definition, Part B, is concerned with creating a strategy for reaching your financial objectives. Your financial objectives may include things like buying a new home, a new automobile, saving for a vacation, paying for your children's further education, planning for retirement, etc. Financial objectives must be clearly specified, taking into account factors like the cost involved and the amount of time needed to complete them. The objectives may be paid for out of your own money and/or by taking out loans. Based on your financial risk tolerance and the amount of time you have to amass the necessary corpus of cash, an investment strategy needs to be developed. Your ability and tolerance for investment risk are the only two components of your financial risk profile.
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