UNIT 3: FINANCIAL PLANNING
Financial planning is a step-by-step approach to meet one's life goals. A financial plan acts as a guide to control
an individual’s income, expenses, savings and investments such that he can manage his money and achieve
future financial needs & goals.
Features of Financial Planning
1. Simple: A financial plan should be simple and easy to understand
2. Flexible: A good financial plan needs to be flexible to adapt to personal, economic and social changes.
3. Foresight: A financial plan should be well prepared and all future contingencies/emergencies should be
provided for.
4. Financial contingencies: A financial plan should provide for any expected/unexpected contingencies that
may arise during the course of the plan.
5. Liquidity: A good financial plan should provide liquidity in terms of withdrawal of funds in case of
emergency requirements.
6. Economical: The cost of planning and implementation should be minimum (less) as compared to the
benefit/future returns.
Financial Needs are expenditures that are essential to live and work. They're the recurring expenses that form
a major portion of an individual’s income. They include essential living cost such as rent, insurance, food and
utilities.
Financial Goals are objectives that individuals or businesses set for their financial future. They are financial
milestones that an individual/business plan to achieve or reach. These goals can be short-term, such as paying
off a credit card debt, or long-term, such as saving for retirement.
Examples of financial goals:
Paying off debt.
Saving for retirement.
Building an emergency fund.
Buying a home.
Saving for a vacation.
Starting a business.
Feeling financially secure.
S.M.A.R.T. Financial Goals
Specific The goal has to be specific, not generic or vague. There should be clarity to avoid future
confusions and misinterpretations.
Measurable financial goal should be made measurable by quantifying it so that the progress and overall
success can be measured accurately. Goals should be expressed in clear numbers, to know
when the goal is achieved.
Achievable One of the biggest obstacles to achieving a goal is setting expectations too high. The surest way
to improve a financial situation is to take achievable steps even if that means taking smaller
steps.
Realistic When setting the goal, the steps taken to achieve the goal should be assessed if they are
realistic given the current circumstances. Setting unrealistic goals usually leads to
disappointment and surrender.
Time-based A clear time frame should be set to achieve a financial goal. This will encourage the goal setter
to follow through, avoid procrastination, and keep himself accountable.
Examples of S.M.A.R.T Financial Goals:
I will save $20,000 in 3 years for a down payment on my future home. I will accomplish this by putting $556 into
a savings account monthly.
I will pay off my $3,000 credit card debt in 10 months by putting $300/month (plus interest) towards it. I will
achieve this by cutting my entertainment expenses and not using my card during this time.
Steps involved in Financial Planning Process
Step 1: Identify current financial situation
The first stage of the financial planning process involves assessment of current financial situation and how you
can change your financial situation. The key areas to reflect are household budget, family commitments, living
expenses, current investment/savings and other financial obligations.
Step 2: Determine Financial Goals
The sole purpose of this step is to differentiate needs from your wants. A crucial step in the financial planning
process is to establish crystal-clear goals. it’s vital to consider the timeline for achieving the goals, along with
the necessary resources and strategies. By having well-defined goals, an individual can direct his efforts and
make informed decisions, track progress and stay motivated. Financial goals can be as follows: higher education,
marriage, purchasing property, retirement plan, capital for business, etc.
Step 3: Identify and Evaluate Alternatives for Investment
After a thorough understanding of financial needs and determining all the appropriate financial goals, the next
thing is the investment alternatives. Based on the term of the goal - short, medium and long term - an integrated
investment strategy should be developed. Taking in account the timeframe, cash flow, risk tolerance, current
insurance coverage, tax strategies and investment goals, a range of investment ideas and financial planning
alternatives should be analyzed in order to determine which one suits the goal the best.
Step 4: Put financial plan into action
This step of financial planning process is considered as an action plan where the best alternative is picked to
achieve short, immediate or long term goals. The appropriate investments are made, budget is prepared, cash
flows are monitored and the journey towards accomplishment of goals begins.
Step 5: Review, Re-evaluate and Monitor the plan
Financial planning is an on-going and dynamic process. This step focuses on assessment of financial decisions
periodically as personal, economic and social factors might change over time. These changes will require
alteration of previously made decisions to fit into the new situation. Monitoring plans will help to prioritize
decisions and make necessary adjustments that will bring financial needs and goals in line with the current life
situation. Continually revisiting and refining a financial plan is pivotal in preserving its relevance and efficacy.
Financial Life Cycle
