Financial Planning & It's Importance

Planning

In simple words, planning is deciding in advance what is to be done, when, where, how and by whom it is to be done. Planning bridges the gap from where we are to where we want to go. It includes the selection of objectives, policies, procedures and programmes from among alternatives. A plan is a predetermined course of action to achieve a specified goal. It is an intellectual process characterized by thinking before doing. It is an attempt on the part of manager to anticipate the future in order to achieve better performance. Planning is the primary function of management.

Different authors have given different definitions of planning from time to time. The main definitions of planning are as follows:

• According to Theo Haimann, “Planning is deciding in advance what is to be done. When a manager plans, he projects a course of action for further attempting to achieve a consistent co-ordinate structure of operations aimed at the desired results.
• According to Billy E. Goetz, “Planning is fundamentally choosing and a planning problem arises when an alternative course of action is discovered.”
• According to Koontz and O’ Donnell, “Planning is an intellectual process, conscious determination of course of action, the basing of decision on purpose, facts and considered estimates.”
• According to Allen, “A plan is a trap laid to capture the future.”

Financial Planning

Financial planning is the process of developing a personal road map for your financial well being. The inputs to the financial planning process are:

1)    Your income, assets, and liabilities

2)    Your financial goals, i.e., your current and future financial needs

3)    Your appetite for risk.

The output of the financial planning process is a personal financial plan that tells you how to use your money to achieve your goals, keeping in mind inflation, real returns, and taxes.

In short, financial planning is the process of systematically planning your finances towards achieving your short-term and long-term financial goals.

Importance of Financial Planning

 
Can you manage without financial planning?

Many people do, but they may find—often when it’s too late — that they don’t have the means to achieve their life goals.

For example, people today realize the importance of living life to the fullest. Consequently, many opt for early retirement from full time jobs, as compared to a few decades ago, when most people worked until the maximum retirement age of 58-60 years.

The average person can, today, expect to live a healthy life well into his or her seventies or eighties, which means that retirement life is almost as long as working life. Financially, it implies that savings (after taking into account inflation) should be enough, not just to maintain the same lifestyle for almost 25-30 years, with no new income, but also to take care of medical expenses, which are usually high the older a person gets. Planning for all this is a tall order for anyone. That’s why it’s critical for everyone to plan their finances from an early age.

The benefits of the financial planning are as under :

• Helps monitor cash flows and reduces unnecessary expenditure.
• Enables maintenance of an optimum balance between income and expenses.
• Helps boost savings and create wealth.
• Helps reduce tax liability.
• Maximizes returns from investments.
• Creates wealth and ensures better wealth management to achieve life goals.
• Financially secures retirement life.
• Reviews insurance needs and therefore also ensures that dependents are financially secure in the unfortunate event of death or disability.
• Lastly, it also ensures that a will is made.