Financial Planning Financial Planning can be done keeping various criterias as the base but for getting most comprehensive results we need to concentrate on 4 things i.e. Life Cycle Stage, Goal Achievement, Expected Returns and Risk Profile of the individual.
Life Cycle Stage : The need for Financial Planning persists throughout the whole life of an individual. However, the priorities of financial needs changes as people grow older and their personal circumstances changes. Thus, the investment objectives will also change over a period of time as the individual ages and succeeds at achieving previously set goals. The investment goals that are generally associated with the various stages of the investor's life can be visualized from following graph :
Young individuals generally start their financial journey with a focus of building wealth because their financial goals are quite some time away and investments can be made for a long term. As the individual progresses in his/her life, his priorities change which leads to change in his investment objectives. For example : the needs of young people may change considerably as soon as they marry. Hence, as individual ages his investment needs could take various forms. The most common are savings for buying house, children's education & marriage and saving for a retirement fund, so that they can retire peacefully.
Understanding what phase you one is in, is important – ensure he / she reconcile his / her own needs with that of the phase as each person is different and one size does not fit all. Once the goals, Life cycle and time horizon for the goals have been identified, the investment objectives become easier to identify.
Goal Achievement : Savings without having any Goal is just like walking on a road without knowing the destinations, So to begin Financial Planning it becomes very necessary to set Goals as setting goals will make one more focused and will help him / her save in accordance with it.
Financial Plan differs from individual to individual as their goals are different and so it is important to identify the goals. Goals can be anything from planning your child’s education to their marriage, it can be your own retirement or buying a new house or a car.
Deciding on goals keep one more committed towards achieving them, Often people set goals but they fail to achieve them just because they don’t make a systematic plan to achieve them. Once one has set his / her goals you know your current position as to where you are today; for example your daughter is 3 years old and time to marriage is 20 years, so one can plan accordingly. Moreover one can also set priority as if; one is planning to buy a house and also planning for his / her child’s marriage as well as for one`s retirement, so one can accordingly allocate money. Buying a house as of now will be on the top of the priority chart and so one can allocate more money there and once he/she achieves this goal one can divert one`s full concentration to other goals.
Expected Returns : Another way of financial planning is on the base of Expected Returns as once your goals are set he is sure of what amount of money he needs and when as he need this money, but for getting this amount one needs to estimate at what rate of return should he invest his savings so as to get the required amount on time. This is where the selection of the best instrument comes in. Estimating on the rate of return helps one decide the correct vehicle to invest in.
Risk Profiling : Understanding the Risk Profile of an individual as well as of the instrument is very necessary before making any kind of investment. There are instruments that may give higher returns of 20% but it may carry high risk along with it so as there are chances of earning more money at the same time one may also loose money. Risk appetite of each individual is different somebody may have an aggressive approach the other may have a moderate approach while the 3rd may be totally conservative with regards to taking risk.
Most investments instruments are linked either to equity or debt, so let us see which instrument is best suited to one or one can take a blend of blend of both in the ratio suitable to him.
