We often hear about this term- ‘Personal Financial Planning’ but what truly is personal financial planning? is it about investments or savings or insurance?

Personal Financial Planning defined as ‘A Process to achieve your financial goals with high returns by minimizing risk’. It is the long-term strategy of managing your finances wisely so you can achieve your financial goals and dreams.

It starts with three main things- first is to find out your financial position, then finding out your personal financial goals, and then making a plan to reach those goals.

As said before, financial planning is a process, so let’s try to understand the main stages of this process:

1.Savings Planning:

Maintaining or recording cash flows, budgeting, finding out unnecessary expenses, cutting down on such expenses and saving more is the first step in the financial planning process.

To save money, a right spending plan (income and expenses) is necessary.

Also, there should be a purpose of saving like buying a car/home, child education, marriage etc. Identifying savings purpose will help determine the duration and how much money is required.

2.Basics Planning:

Second stage of personal financial planning is to cover the ‘ personal finance basics’. Basics means- having enough in emergency fund, adequate coverage of health insurance and term insurance. Your savings and investments will be intact if you have your basics in place for any unexpected emergencies.

• Emergency Fund: Emergency fund should be equivalent to 6 months of expenses. More savings you have in this fund, more prepared you will be for any emergencies or unexpected events.
• Term Insurance: It is a pure form of insurance. It gives full protection against death as well as total & permanent disability. This insurance is a ‘must’ in every financial plan and at any life stage.
• Health Insurance: Health insurance covers you and your family from financial loss due to critical illness, accidents or disability. It also provides income when disabled or covers cost of medical care.

3. Investment planning:

Investment planning is third component or stage of financial planning. Before making any investments, you need to assess your investor profile means your –

• Goal
• Risk Capacity
• Investment Horizon
• Taxation
• Age
• Income source and its stability
• Other factors like savings, mode of investment etc.

Accordingly, you can make your investments. These factors also support in making a suitable investment portfolio with right asset allocation and diversification.  Implementation of investment plan is another important aspect.

The timescale of your financial plan can stretch for years and therefore you may not see immediate results.  Therefore, it’s required that you should stick to the steps in your plan.

4. Review and Rebalancing

As you know in personal finance and in finance world, unexpected things do happen. Also, life of an investor and market situation changes continuously due to reasons like change in job/location, age, dependents, responsibilities, market and economic conditions, taxation rules etc.

Any of such things can impact your finances, so it demands to make changes to your plan accordingly. That way, it can better reflect your financial standing.   A regular review and rebalancing of investment portfolio, keep you on track, align with your goal, risk and asset allocation and helps to achieve your financial goals.

Taking help of a financial advisor/planner

It is certainly possible to make a personal financial plan on your own, but it’s an exceptionally difficult process with so many elements and factors. Taking help of a financial advisor/planner can help you with realistic goal planning and can guide you to move toward your financial goals.