Over the last few years, the term “financial planning” has been very often used and heard by many of us. In this article, we explore as to what this term means and why it is important for us all.

What is financial planning:

Simply put, financial planning is the process of meeting your life goals through the proper management of your finances. The life (read financial) goals can include buying a home, saving for your child's education & marriage or planning for your retirement or protecting your family. It is a process whereby a qualified financial advisor will consider your entire financial situation and goals and provide you with appropriate action steps to fulfil your goals and better manage your finances. It is not a one-time process but is continuous in nature as your life situations and finances change over time. You also need to regularly review your financial plans & your investments to ensure that you are well on track to meeting your financial goals/objectives.

Why financial planning is needed?

Given the nature of today's life, with growing uncertainty, rising aspirations and increasing costs of living, doing thorough financial planning have become a must for each of us. It is also better to plan and be ready for any situation rather than be passive and wait for things to happen before doing anything about it. A special case to mention is of Retirement planning, which has become very critical since the average life expectancy has increased and appropriate planning is needed to ensure that your 20-30 years of your life after retirement is dignified, peaceful and self-reliant. 

In the absence of proper financial planning, the following are the risks faced by a client.

• Continued lack of understanding of your financial situation

• Delay and wastage of critical time for planning for goals

• Continued exposure to financial risks in life to you and family

The financial planning process:

The financial planning process is a logical, six-step procedure from the perspective of a client.

1. Establish and define the relationship: The first step is establishing a relationship with the financial advisor/expert. The client should inquire about the services offered and the process. The client should also inquire about the professional’s competencies and experience. The client should also enquire about any fees and how the advisor would be remunerated from the same. The client should make clear any expectations he/she has with the advisor/expert.

2. Sharing of information: The next step would be the identification of your personal and financial objectives, needs and priorities that are relevant to the scope of the engagement before making and/or implementing any recommendations. The financial expert would request sufficient quantitative and qualitative information and documents from you relevant to the scope of the engagement before making and/or implementing any recommendations.

3. Analysis and assessment of your financial status: The next step would now be to analyse your information, subject to the scope of the engagement, to gain an understanding of your financial situation. The step involves assessment of strengths and weaknesses of your current financial situation and compares them to your objectives, needs and priorities.

4. Development of financial plan recommendations and presentation: The next step involves the financial planning expert considering one or more strategies relevant to your current situation that could reasonably meet your objectives, needs and priorities. Then the financial planning recommendations based on the selected strategies will be developed and presented to you. You may seek to understand the supporting rationale in a way that allows you to make an informed decision.

5. Implementation of recommendations: Once you have understood and given your approval to the recommendations, the execution will happen. Note that the expert would expect your agreement on implementation responsibilities that are consistent with the scope of the engagement. Based on the scope of the engagement, the expert identifies and presents the appropriate product(s) and service(s) that are consistent with the recommendations accepted by you.

6. Review your financial situation: The expert and you would then mutually define and agree on terms for reviewing and reevaluating your situation, including goals, risk profile, lifestyle and other relevant changes. While conducting the period review, the expert along with you will review your situation to assess progress toward achievement of the objectives of the recommendations, determine if they are still appropriate, and confirm any revisions mutually considered necessary.

Advantages of financial planning:

To summarise, the following are the key reasons or benefits that you would get from financial planning.

• Proper understanding of your financial situation

• Finalisation of the financial goals and knowing what it would take to achieve the same

• Understanding your insurance needs and ensuring financial security

• Understanding how your financial decisions and choices will impact your financial well-being

• Having a path laid out for you and your family's long term financial well-being

Most of us do not have adequate information about financial planning and only in recent years has there been some growing awareness about it. Most of us though still believe that they are knowledgeable and smart enough to decide upon their finances on their own ignoring the fact that this is a very broad subject that requires professional expertise. We are ready to visit and pay an accountant, doctor, lawyer or any other professional but are shy when it comes to asking for a financial plan from financial experts. A better, secured financial life is a dream for all of us which, with proper financial planning, can become a reality. The need is to understand this crucial part of our life and give it the importance and priority it deserves.