The Importance of Financial Planning: How to Get Started

The Importance of Financial Planning: How to Get Started

Ketki Jadhav

Mar 15, 2023 / Reading Time: Approx. 8 mins

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Saving money is something that most people are aware they should do. However, when it comes to actually putting it into practice, many individuals procrastinate strategically investing for the future with an appropriate financial plan. Hence, we can say that there are two types of individuals; non-planners and planners. Non-planners are those who save money whenever possible — they may contribute a small amount in a bank recurring deposit or random mutual fund schemes and hope for the best in the long run. Whereas planners are those, who know precisely what they are saving for, how much money they need to save, and how long it will take them to achieve their goals.

If you identify more with the first type of person, you are not alone! Many Indians do not make a financial plan or procrastinate making a financial plan because they believe that they do not have sufficient income to create a financial plan or it is too complicated to learn about it and implement it. However, this is not true! You do not need a large sum of money to make a financial plan. In fact, you can start investing in suitable mutual fund schemes with as low as Rs 500 a month! Besides, while learning the nuances of financial planning may require time and effort, depending upon your current level of knowledge, it is certainly not as complicated as it may sound.

Amidst the fast-paced daily routine, organising anything beyond a few days may appear to be a burden. It is understandable to question whether financial planning is genuinely beneficial. However, all financial experts worldwide, including PersonalFN, believe it is an effective way to reach your goals.

This article elucidates the importance of financial planning and how to get started.

The Importance of Financial Planning: How to Get Started

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Let’s first understand what a financial plan is:

Financial planning is a comprehensive process that assesses an individual’s current and future financial situation to help them achieve their goals in a systematic way. It involves creating a roadmap for meeting all of life’s expenses, including unexpected ones.

While one may feel they do not need a financial plan if they have enough savings to cover their expenses in the future, take note that inflation could be a major issue, capable of quickly eating away your savings and leaving you with less money than you anticipated.

Inflation is the general rise in the prices of goods and services over time, which can erode the value of one’s savings. For instance, a packet of milk that costs Rs 27 today may cost Rs 30 in a few months, and this can become a significant issue in the long term, particularly in retirement.

Suppose your current monthly household expenses are Rs 40,000, and your retirement timeline is 20 years, with an inflation rate of 8{3df20c542cc6b6b63f1c547f8fb389a9f235bb0504150b9df2ff264aa9a6c16c} per annum; the future household expense post-retirement is projected to be Rs 1,86,438 per month. This significant increase in expenses underscores the need to plan for retirement and ensure that one’s investments are aligned with their long-term goals. By investing prudently, individuals can aim to generate returns that exceed the rate of inflation, thereby maintaining their purchasing power and achieving their financial goals.

Let’s take another example, say you are currently saving Rs 10,000 per month towards a future goal, such as buying a house in 10 years. Assuming an inflation rate of 8{3df20c542cc6b6b63f1c547f8fb389a9f235bb0504150b9df2ff264aa9a6c16c} per annum, the cost of a house is likely to increase significantly over the next decade. For instance, if the current price of the house is Rs 50 lakhs, it is projected to cost Rs 1,07,94,625 in the next 10 years due to inflation. Without factoring in inflation, you may believe that you only need to save Rs 50 lakhs to achieve your goal, but in reality, you will need to save a lot more to keep up with rising costs. This highlights the importance of factoring inflation into your financial planning and ensuring that your investments are aligned with your long-term goals. By investing in assets that generate returns more than the rate of inflation, you can aim to maintain your purchasing power and achieve your financial objectives.

Here are the practical advantages of creating a financial plan:

1. Increased Savings: By gaining insight into your income and expenses, a financial plan can help you create a solid plan to save more. You can reduce your expenses and, consequently, boost your savings in the long run.

2. Improved Lifestyle: One of the primary goals of investors is to manage their finances without compromising their standard of living. A sound financial plan can help you pay your bills, repay EMIs, and cover other expenses while maintaining a comfortable lifestyle.

3. Prepare for Emergencies: Building a contingency fund is an essential component of financial planning. It can be used to cover unexpected eventualities, such as a medical emergency or job loss. Hence, having a financial plan in place can help you prepare for any unforeseen circumstances.

How to get started with financial planning?

1. Assess Your Financial Situation:

Assessing your current financial situation is the first step to getting started with financial planning, and it will give you a clear picture of your present financial situation. To assess your financial situation, you should discuss with your spouse and gather all information about your sources of income, debts, assets, liabilities, etc. Having this conversation with your spouse will ensure you both are on the same page. It is important to understand your financial mindset and identify areas where essential improvements can be made. This will be a starting point for your financial planning journey that can help you achieve your short-term and long-term financial goals.

2. Define Your S.M.A.R.T. Financial Goals:

The main aim of financial planning is to assist you in accomplishing your financial objectives. To begin with, it is crucial to ensure that your financial goals are Specific, Measurable, Achievable, Realistic, and Time-bound, i.e., they should be S.M.A.R.T. Additionally, it is best to categorise your goals into short-term (up to 2 years), medium-term (between 2 to 5 years), and long-term (over 5 years).

Following the S.M.A.R.T. framework can increase your chances of success in achieving your financial goals and ensure that you are taking the right steps towards a better financial future.

3. Recognise Areas of Shortfall:

After evaluating your financial situation and setting your financial goals, you will have a better understanding of where you stand financially and where you want to be in the future. If You want to achieve your financial goals, it is crucial to know how much income you currently have or the expected income in the future and how much you need to fulfil various goals.

Once you know the amount you need to reach your financial goals, you will get an idea of the shortfall, which is the gap between your current financial position and desired financial position.

4. Prepare a Budget:

Budgeting is a method of devising an equitable formula for efficiently utilising your earned money. In simple words, a budget is a detailed summary of your estimated income and expenses for a specific time frame, such as a month. It can help you manage your expenditures and prevent you from accumulating debt.

While numerous free budgeting software and applications are available online, starting with basic tools like pen and paper or an MS Excel sheet can help you understand the process. By keeping track of your expenses and comparing them to your estimated income, budgeting can assist you in making informed financial decisions, preparing for emergencies, and achieving your financial objectives.

5. Asset Allocation Is the Key:

Asset allocation is a crucial aspect of financial planning, and the right allocation can make all the difference in achieving your financial goals. Distributing your investment portfolio across various asset classes, such as stocks, bonds, gold, etc., will help you minimise the investment risk and optimise returns.

Your optimum asset allocation will depend on your individual financial goals, risk appetite, and investment horizon. Younger investors with longer time horizons can afford to take more risks and, therefore, may allocate a higher percentage of their portfolio to equity and equity-related instruments, such as equity mutual funds, which have the potential to generate higher returns but carry higher risks. In contrast, older investors nearing retirement may prefer a more conservative allocation with a higher percentage in debt and debt-related financial instruments, such as debt mutual funds and bank fixed deposits, which have lower potential returns but are considered less risky.

6. Start Investing:

Once you have a solid understanding of your goals and available investment options and their level of risk, you can start investing in a way that aligns with your risk tolerance and investment objectives. While fixed-income instruments like bank fixed deposits offer guaranteed returns, they lack the potential to generate inflation-beating returns. Hence, mutual funds are a better option for many investors as they offer diverse investment options managed by a team of professionals. This can be particularly beneficial for those who are new to investing or don’t have the time or expertise to manage their investments actively. With a mutual fund, you can gain exposure to a variety of asset classes, such as stocks, bonds, gold, real estate, etc., without having to purchase individual securities.

Investing in mutual funds through the Systematic Investment Plan (SIP) route is an excellent option for both new and seasoned investors to gradually build a fund and generate returns that surpass inflation. SIP allows for the power of compounding and rupee cost averaging, which can be very effective.

Apart from investing towards your specific financial goals, planning for unexpected events through a contingency fund is equally necessary to make sure your financial plan works, and you do not have to liquidate your investments when an emergency comes. This fund should be readily accessible in case of unexpected expenses such as a loss of a job or a medical emergency. It is recommended to have at least 6 to 24 months’ worth of living expenses saved in a contingency fund. By having a contingency fund, you can avoid having to dip into your savings or going into debt to cover unexpected expenses. You should regularly contribute to your emergency fund and only use it for true emergencies and not for non-essential purchases. You can start investing in a separate savings bank account or an investment option that allows you to withdraw funds whenever an emergency occurs. This will give you peace of mind and ensure you are better prepared for unexpected events that may impact your financial planning.

7. Review Your Portfolio Periodically:

Regularly reviewing your financial plan ensures that your investments are aligned with your goals and, hence, increases the likelihood of achieving your goals. This allows you to adapt to any personal or economic changes that may occur in the future. For instance, if you have invested in equities, it is advisable to monitor the performance periodically. It is possible that a particular stock or equity mutual fund may not be performing well. Similarly, an equity mutual fund scheme may undergo changes in investment objective or style that no longer suit your investment goals. Hence, it makes sense to review your plan frequently and eliminate the investments that no longer align with your goals.


8. Take Professional Help:

If you feel you do not have the required knowledge or expertise to make the right financial decisions, you should consider taking the help of a financial planner. A financial planner can advise you on managing your finances, creating a budget, and developing a long-term financial plan tailored to your specific goals. By working with a financial advisor, you can gain peace of mind knowing that you have a well-crafted plan in place to help you achieve your financial goals. Additionally, a financial advisor can provide ongoing support and guidance, helping you adjust your plan as the circumstances may change over time.

PersonalFN is dedicated to providing unbiased and honest perspectives and opinions on different personal finance concerns that may affect your finances and investments. We have been delivering customised financial planning solutions to our customers in India and Non-Resident Indians to assist them in achieving their financial objectives.

We offer personalised Financial Planning services which will help you in planning and achieving all of your financial goals, such as planning for retirement, saving for your children’s future, analysing insurance requirements, purchasing a house, and many others. Whether you need a financial plan for single or multiple goals or simply want to review your mutual fund and insurance portfolio, PersonalFN has you covered.

To conclude:

The inevitability of change means we should avoid procrastination when it comes to financial planning. You need to understand that achieving financial stability and security is not as difficult or overwhelming as it may seem. To get started, all you need to do is create a realistic financial plan and commit to following it.

If you’re unsure how to begin planning your finances, don’t hesitate to call us on 022-61361200 or drop a mail at [email protected]. We offer mutual fund investment consulting services and can help you create a sound financial plan that aligns with your life goals. As a SEBI-registered investment advisor, PersonalFN is committed to providing reliable and trustworthy financial guidance.


KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.