Financial Awareness Level
What is Financial Planning? Definition, Process, Types & Examples
Introduction
Financial planning is a fundamental step toward achieving long-term financial stability and security. Whether you're planning for retirement, your child’s education, or simply trying to manage your income better, a well-structured financial plan acts as your roadmap. Financial planning is not a one-time activity; it requires regular monitoring and adjustments. Periodically review your financial plan to track the performance of your investments and ensure they are on track to meet your goals.
If you find that your investments are not performing as expected, or if there are changes in your financial situation or goals, be prepared to make adjustments. This might involve reallocating your investments, increasing your savings rate, or even revising your goals.
In this blog, we explain what financial planning is, its definition, types, process, and provide a simple example to help you get started.
Financial Planning Definition Financial planning is the process of evaluating your current financial situation, setting financial goals, and creating a strategy to achieve those goals through proper budgeting, investing, saving, and risk management.
In simpler terms, it's about planning your money smartly so you can meet short-term and long-term financial needs without stress.
Why is Financial Planning Important?
- Helps manage income, expenses, and investments efficiently
- Prepares you for emergencies and future financial goals
- Improves financial discipline and savings
- Minimizes debt and enhances wealth creation
- Reduces financial anxiety and uncertainty
Financial Planning Process: 6 Key Steps
1. Assess Your Current Financial Situation
- Track income, expenses, assets, and liabilities
2. Set Financial Goals
- Short-term (e.g., buying a vehicle)
- Medium-term (e.g., down payment for a house)
- Long-term (e.g., retirement corpus)
3. Identify Investment Options
- Choose instruments like mutual funds, fixed deposits, PPF, etc., based on your goals and risk profile (You are recommended to seek advice from financial advisor for better understanding)
4. Create a Budget and Savings Plan
- Allocate income across expenses, savings, and investments
5. Implement the Plan
- Open accounts, start SIPs, buy insurance, automate savings
6. Monitor and Review Regularly
- Adjust for life events, income changes, or market movements
Types of Financial Planning
- Tax Planning – Minimising tax liability through smart investment choices
- Investment Planning – Allocating assets to generate long-term wealth
- Retirement Planning – Ensuring adequate savings and income for post-retirement life
- Insurance Planning – Protecting against unforeseen financial risks (life, health, property)
- Estate Planning – Managing asset distribution after death through wills and nominations
- Education Planning – Saving for children's school, college, or higher education
Financial Plan Example (Basic) (Illustration purpose only)
- Monthly Income: ₹80,000
- Expenses: ₹40,000
- Savings: ₹10,000
- SIP in Mutual Funds: ₹15,000
- Emergency Fund: ₹5,000/month until it reaches ₹2 lakh
- Life & Health Insurance Premiums: ₹5,000
This plan balances current expenses while steadily building savings and investments for future goals.
Choosing the Right Investment Options
Selecting the right investment options is crucial for achieving your long term financial goals.
Mutual fund schemes, in particular, offer a range of options to suit different risk appetites and financial goals.
When choosing mutual fund schemes, consider factors such as your risk tolerance, investment horizon, and financial goals. Avoid putting all your money into a single investment; instead, diversify your portfolio to spread risk.
Conclusion
Financial planning is not just for the wealthy or finance experts—it’s for everyone. With a structured approach and regular monitoring, anyone can build a secure financial future. The sooner you start, the more benefits you reap over time. Whether you’re a salaried employee, entrepreneur, or retiree, financial planning helps you live with more freedom and less financial worry.
Additional links
What is a Mutual Fund? - Beginner's Guide to Investing
AMFI - Introduction to Mutual Funds
FAQ Section
What is financial planning in simple words?
It’s the process of managing your money to achieve financial goals like saving, investing, budgeting, and planning for the future.
Why is financial planning important?
It gives you control over your income and expenses, helps achieve life goals, and prepares you for emergencies.
What are the steps involved in financial planning?
The process includes assessing your finances, setting goals, budgeting, investing, implementing, and reviewing regularly.
Can I do financial planning on my own?
Yes, you can start with basic planning using budgeting apps or tools. For complex needs, a certified financial planner may help.
What is the ideal age to start financial planning?
As early as possible. Starting in your 20s gives you more time to build wealth and achieve long-term goals.
Is financial planning only about investing?
No. It also includes budgeting, saving, insurance planning, tax planning, and retirement planning.
How often should I review my financial plan?
At least once a year or after major life events like a job change, marriage, or having a child.
What is the role of a financial planner?
A financial planner helps assess your financial situation, create customized plans, and ensure your goals are achievable.
Is financial planning useful for low-income earners?
Absolutely. In fact, it’s more important, as proper planning helps manage limited resources efficiently.
What tools can I use for financial planning?
You can use spreadsheets, financial planning apps, online calculators, or consult a financial advisor.
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The information is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.
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