A Guide for Financial Planning, its need, process, facts & what to expect from it!

What is Financial Planning?

Financial Planning is an ongoing process to help you make sensible decisions about money that can help you achieve your goals in life. In other words, a financial plan is a systematic approach to maximizing an investor’s existing financial resources by utilizing financial tools to achieve his financial goals.

Explaining Financial Planning

In mathematics terms, a financial plan can be described with three major components:

A Financial Plan is to maximize your existing financial resources by using various financial tools to achieve your financial goals.

Financial Plan: FR + FT = FG

Meaning of Financial Plan

A financial plan is about the process of meeting one life goals through proper management of one’s finances. Life goals can include buying a home, saving for a child’s education, or planning for retirement. It is a process that consists of specific steps that help one to take a big-picture look at where you are financial. Using these steps one can work out where he is now, what he may need in the future and what he must do to reach his goals.

Need for Financial Planning - Explained!

Why A Financial Plan is Needed?

A financial Plan provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. By viewing each financial decision as part of the whole, you can consider its short and long-term effects on your life goals. You can also adapt more easily to life changes and feel more secure that your goals are on track.

When the Need for Financial Plan Arises?

The need for a financial plan thus arises from the need to meet the financial goals that enable the achievement of one’s life goals. Generally, everyone invests in the various available avenues but very few investments are linked to individual goals. All of us have goals to be fulfilled at every stage of life. Life and financial goals are very diverse and are as under:

1. Protecting Oneself & Family against Financial Risks:

The loss of a job, a serious illness, a legal problem, a sudden death, an accident, or a natural disaster will prompt seeking a piece of financial advice. Financial planning will help in analyzing one’s insurance needs (disability and long-term care) in relation to one’s overall financial circumstances and goals. Moreover, in addition to all these uncertain risks, all investments have certain risks as well, such as market risk, inflation risk, interest rate risk & reinvestment risk. Financial Planning helps in reducing and managing all these risks. Prevention is better than cure so it’s better to start planning.

2. Organize and Manage Finances:

Many people have complex financial life, yet they lack the time, expertise, discipline, and objectivity to put their finances in order. Financial Planning will help in examining the overall net worth, financial situation, goals, and objectives, and recommend strategies to get the most from their investments, so that life’s goals are achieved.

3. Achieving Personal Goals Such as Child Education, Marriage, Car, and Home:

Everyone has their own set of individual financial goals. Yours may include funding a child’s college education, enjoying a comfortable retirement, purchasing a home, starting your own business, minimizing your tax costs, or any combination thereof. But no matter which financial goals you choose, developing a comprehensive financial plan will help you in achieving them in a systematic manner.

4. To be Able to Retire Peacefully:

Retirement is like going on a long vacation where the expenses are increasing and there is no regular income, hence it is very important to have enough retirement kitty before retirement. Moreover, as life expectancy has increased nowadays, there should be enough kitty to avail the medical expenses, which will also increase at the time of retirement due to the rising cost of living and inflation. With the help of Financial Planning one can get a clear picture of the kind of lifestyle one wishes for at the time of retirement and hence can plan accordingly. Know more about retirement planning here.

5. Passing Wealth to Next Generation:

Estate planning will ensure that your assets will be used to benefit the people that you choose, and in the amounts chosen by you. A Financial planner is needed to discuss wills, living wills, powers of attorney, life insurance, trusts, and other estate planning issues. A well-drafted estate plan provides assurance that the taxes and costs associated with your death will be minimized.

Need A Financial Planner?

Get expert assistance from Finvest India

Benefits of Financial Planning:

You will figure out the financial needs (short-term & long-term) along with the current financial status.
You can achieve your goals with the optimum use of resources, which means very efficiently!
You’ll understand the positive impact of financial investments on your personal & family life.
You will learn an adaptive mindset for changing personal & financial situations.
You will have the mindset of the fulfillment of achieving financial goals & securing your future & family.

Process of Financial Planning

When You should start your Financial Plan?

Financial planning, especially at an early age can help to give your life focus and help you to achieve your goals in life. Financial planning gives you a set of tools to create wealth and build up a nest egg that you can use in case of emergency. Financial planning also gives you direction, the direction you need to make informed decisions about investments so that you won’t make any mistakes and you can reap the benefits for the rest of your life.

Steps for Financial Planning -

The Financial Planning Standards Board (FPSB) defines the financial planning process as consisting of the following six steps. We have just reproduced the exact process prescribed –

1. Establish and define the client-planner relationship:

The financial planner should clearly explain and document the services that he or she will provide to clients and define both his/her and the client’s responsibilities during the financial planning engagement. The financial planner should explain fully how the financial planner will be paid and by whom. The client and the planner should agree on how long the professional relationship should last and on how decisions will be made.

2. Gather client data, including goals:

The financial planner should ask for information about the client’s financial situation. The client and the planner should mutually define the client’s personal and financial goals, understand your time frame for results and discuss, if relevant, how the client feels about risk. The financial planner should gather all the necessary documents before giving the clients the advice they need.

3. Analyze and evaluate your financial status:

The financial planner should analyze the client’s information to assess the current situation and determine what must be done to meet the client’s goals. Depending on what services the clients have asked for, this could include analyzing the client’s assets, liabilities, cash flow, current insurance coverage, investments, or tax strategies.

4. Develop and present financial planning recommendations and/or alternatives:

The financial planner should offer financial planning recommendations that address the client’s goals, based on the information provided by clients. The planner should go over the recommendations with clients to help them understand so that the clients can make informed decisions. The planner should also listen to the client’s concerns and revise the recommendations as appropriate.

5. Implement the financial planning recommendations:

The client and the financial planner should agree on how the recommendations will be carried out. The planner may carry out the recommendations or serve as the client’s coach, coordinating the process with the client and other professionals such as attorneys, accountants, or stockbrokers.

6. Monitor the financial planning recommendations:

The client and the financial planner should agree on who will monitor the client’s progress toward your goals. If the planner is in charge of the process, he or she should report to the client periodically to review the situation and adjust the recommendations, if needed, as the client’s life changes.

Facts About Financial Planning

1. Financial Planning is a Process and Discipline:

Any Financial Plan provides a brief on your financial goals and a way to achieve them. It can help you focus on your financial resources and goals, and create a plan of action for attaining your dreams. However, your situation will change constantly over time, due to changes in your personal circumstances or in external circumstances. As a prudent person, you should review and update your Plan periodically; to be sure it still meets your needs.

2. Financial Planning is Not Precise and Provides ‘No Guarantees:

The projections or results of any Financial Plan are not precise and are often based on the information provided plus many assumptions & workings. The future is uncertain and planning for a large number of years in advance is difficult. One should use Financial Planning for guidance in order to plan for the foreseeable future and do regular reviews of the same. Prudent financial planning may increase your chances for success, but cannot guarantee your goals will be achieved.

3. Financial Plan – Understanding Assumptions/ Disclosures is Important

A Financial Plan is often based upon many assumptions and has certain inherent limitations attached to it. Further, there are also many other features, and issues that you would like to know beforehand. Such assumptions, limitations, features, issues, etc. should be detailed in the financial plan and you should through the same at your leisure. The information includes assumptions about future returns on products, your income growth, inflation assumptions, etc., disclosure on calculation methodology and limitations, etc.

Financial Planners

Expectations from Financial Advisors and Clients:

The financial plan is a joint exercise that will be successful only if it is undertaken with full understanding, commitment, and trust between both, the financial advisor and the client. The following are the broad expectations from both parties for ensuring the success of any financial planning exercise.

Expectations from Financial Advisors

Preparing a suitable personal financial plan for clients
Making comprehensive recommendations for investment, protection needs & strategies
Implementation support for your investment, protection needs & strategies
Periodical assessment of personal, financial situation and review of the finalized financial plans
Keeping track of your investments and updating you on the same.

A financial Advisor must,

Put their clients’ best interests first;
Act with due care and in utmost good faith;
Not mislead clients;
Provide full and fair disclosure of all material facts; and
Disclose and fairly manage all material conflicts of interest.

Expectations from clients

Provide all material and relevant data and information for financial planning. The financial plans shall be limited by the information shared by clients
Intimate financial advisors of the ongoing changes and updates in a personal, financial situation
Actively participate in the entire financial planning process and provide time for the same
Respect the financial recommendations made/suggested as per requirements. Please note that there is no commitment from the client’s side and one is free to make their own decision

Financial Planner in Bangalore

Finvest India’s Comprehensive Financial Plan is designed to help you achieve specific goals, at the right time and with adequate peace of mind. Our detailed process can be segregated into specific steps to optimize your wealth-building efforts along the way to a secure future. For 2 decades, we have been the guiding force behind the wealth-building journeys of financially responsible individuals.

How to Make Financial Planning Work?

The clients are the focus of the financial planning process. To achieve the best results from your engagement, it is better to avoid some of the common mistakes in the financial planning process…

Set SMART – ‘Specific, Measurable, Achievable, Relevant, Time-bound Goals for the clients
Understand the explicit and implicit costs and effects of each financial decision and non-decision
A periodic review of the financial situation and the life goals /objectives is necessary
Cover all essential areas /aspects of life and explore emerging situations
Do not procrastinate implementing financial plans or taking any financial decisions
Be realistic in expectations and make proper assumptions
Disclose all important matters to the client
Focus only on areas that are strong and ignore weak areas
Ignoring taxation

Financial Advisors must realize that:

Financial planning is for everyone – rich or poor.
It is never too late to do financial planning. The sooner the better.
Financial planning is different from investing or portfolio management
It is important to collect all relevant information and save all financial planning-related documents
SEBI (Investment Adviser) Regulations, 2013 may be applicable to them