Personal Financial Planning is a process of management of finance facilitated by an individual or a family unit in order to plan its savings, investment and expenditure for a given period of time taking into consideration future events and contingencies. This process guides regarding budget and spending of monetary resources. With the help of personal planning, one can figure out the minimum amount to be retained as saving which will benefit to a huge extent in the future.
While planning personal finance an individual takes into account various options of investment ranging from investment in private equity such as shares, bonds to banking products such as fixed deposits and even insurance policies in order to avoid contingent losses.
BENEFITS OF FINANCIAL PLANNING
- Mistakes regarding wrong investments can be avoided.
- Goal achievement is much easier due to clarity of finances.
- Security against future crisis or contingencies.
- One can define financial goals and know whether they are realistic or not.
- Maximization of Monetary Funds.
- Provides a comfortable living with less worry.
- Helps in building of wealth.
PROCESS OF FINANCIAL PLANNING
Personal finance planning is a dynamic process that has to be monitored continuously and its results should be valued against the defined financial goals in the light of occurrence of various financial or non-financial events.
Generally, 5 steps are involved which are as follows
The very first step involves assessment of finances. Personal finances are analysed with the help of financial statements such as Balance Sheet and Income statement which helps to ascertain the financial position of an individual or family unit. It helps to know the expenses and income received during the year as well as Net assets available on a certain date.
2. Goal setting
After assessment of financial statements, Goals are set up on short term basis and long term basis. The goals defined should be realistic in nature and should be achievable within the time frame planned for each of the goals. It provides satisfaction and serves as a motivating factor.it acts as a directing function of financial planning.
3. Plan creation
After goal setting, plans are created in a way so that the goals can be achieved as early as possible. The financial plan describes how to achieve the plans in reference to goals. For example: Reduction of Unnecessary Expenses or Investment in equity.
A financial plan is executed in line with the plan created and goals defined. One should execute the plan with a disciplined and regular approach.
5. Monitoring and reassessment
After the execution of financial plan, the plans should be continuously monitored from time to time and should be evaluated against the target goals in order to ensure successful financial planning.
Thus, Personal Financial Planning is the process of achieving life goals through proper management of finances in a strategic manner. It may include purchasing a house, saving for higher education or other aspiration goals set to enjoy a higher standard of living. It is not limited to a particular class but such practice should be carried out by each and every individual in order to maximize savings.
A large contribution can be made in every sphere of life if we properly plan personal investment, finances and taxation.
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