How Planning Can Help You Improve Your Finances

Financial planning is a crucial strategic process carried out to achieve long-term goals by effectively utilizing available financial resources. Financial planning is an often overlooked topic for the majority of the population. However, it is one of the most important aspects of being financially content and helps improve the overall happiness and quality of life. In fact, as per a report by FPSB, 80% of Indian consumers felt professional financial planning improved their quality of life. Also, 75% of the consumers were more financially confident of their financial standing.This systematic approach involves assessing current financial situations, setting clear objectives, and crafting strategies to enhance financial security and growth. Effective financial planning maximises one’s income potential and safeguards from unforeseen financial hitches.

According to a report by FPSB, 80 out of every 100 Indian consumers felt professional financial planning services improved their quality of life. It also emerged that 75 out of 100 consumers were more financially confident.

What is to be noted here is that you don’t always require professional/expert help when planning out your finances. With the help of the tips and tricks we’ve outlined below, you too can ace your financial plans. But before that, what exactly is financial planning? 

Understanding Financial Planning

Financial planning is a crucial strategic process designed to achieve long-term goals by effectively utilising the available financial resources. This systematic approach involves assessing current financial situations, setting clear objectives, and crafting strategies to enhance financial security and growth. Effective financial planning maximises one’s income potential and safeguards from unforeseen financial pitfalls while at the same time allowing for long-term goals to be realised.

Through personal financial planning, individuals can ensure each plan is customized to address unique financial circumstances and aspirations.

For example, according to a pan-India survey conducted by LocalCircles, 48% of households in the country are experiencing falling earnings and savings.

Furthermore, according to a report by RBI, India’s net household savings are at a 47-year low, pegged at 5.3% of GDP in the fiscal year 2023 from 7.3% in 2022.

What Can Financial Planning Achieve For an Individual?

Wealth accumulation: Building an asset over time to ensure financial safety

• Risk management: Identification and mitigation of potential economic risks, for example, through insurance and diversification
• Retirement planning: Making sure there is a steady flow of income post-retirement to maintain a desired lifestyle
• Tax optimization: Minimising tax liabilities through planning and maximising after-tax income
• Security: Provides a financial structure to provide control over financial uncertainties by ensuring that every personal financial feature is under control
• Achievement of goals: Aiding in setting up and achieving both short- and long-term financial goals
• Legacy planning: Estate planning that will provide for the appropriate distribution of one’s property according to an individual’s requirements

What are the Components of Financial Planning?

Financial planning extends beyond merely possessing funds; it means that financial management aids in the adjustment of different stages and the accomplishments planned in life. Here are the key components:

1. Budgeting: This is the cornerstone of financial planning. It involves tracking of income and expenditure to develop a plan that keeps spending under control and increases savings. 
2. Savings: Savings are critical in forming emergency funds and future investments’ capital. Financial professionals suggest setting aside a minimum of 20% of earnings monthly to bring up an amount that can create a vast safety net. The survey says that people above 30 should save about 25% of their income as opposed to younger people who save 10%-15%. 
3. Investment: Investment is the only way to generate wealth and protect oneself against inflation. By intelligently investing in stocks, bonds, real estate, and other instruments, one’s wealth can significantly increase over a considerable period. Portfolio diversification will help strike the right balance between risk and return for a prudent investor.
4. Tax planning: Proper tax planning ensures that all possible deductions and credits are taken into account, reducing the total outflow of taxes. These strategies involve actions intended to defer levies from personal income, generate investment income, and make estate transfers to increase financial efficiency in general.
5. Retirement Planning: Retirement planning is the process of keeping aside funds so that one may remain financially secure after superannuation. A strategic guideline within this process is the 30:30:30:10 rule. According to this rule, 30% should go to spending, using, and living a retired life.

How to Perform Basic Financial Planning?

Proper financial planning is a multi-step process that requires meticulous consideration of each step and application. Here are the steps involved in the process:

Step 1: Evaluate Current Financial Position

The first stage involves a full-scale evaluation of one’s financial state, including all sources of income, debts, possessions, and current wealth. 

Step  2: Set Financial Goals

Then, lay down clear, attainable financial goals. Objectives should be SMART: specific, measurable, achievable, relevant, and time-based. An important financial goal for most individuals is financial freedom. That said, PowerAge is a tool that helps solve for this easily and intuitively. There could be other financial decisions like planning for a house, or higher education, or planning for a car or wedding etc. These scenarios are also covered under PowerAge.

Step 3: Plan to Accomplish These Goals

After goals are recognized, build a strategic plan that outlines how to accomplish them. This plan can include increasing one’s income through investments, reducing costs or spending, changing insurance, or having an emergency fund.

Step 4: Implement the Plan

A plan is merely a document; without implementation, it holds no value. Implementation calls for taking tangible action to follow a set plan. This may involve setting up automatic savings, buying required insurance, or investing in diversified financial instruments.

Step 5: Monitor and Review

Financial planning is a process that needs to be monitored and kept under constant review. Changes in financial plans or goals are thus made if circumstances change. Here, PowerAge can be of great use, such that individuals can keep a track of their finances.

What are the Challenges in Financial Planning?

Several common challenges may arise for individuals at certain times. Understanding these is key to developing effective strategies for overcoming them.

• Lack of Awareness and Understanding: Lack of basic financial literacy primarily contributes to their “inability to craft effective financial plans.” According to a survey by the National Centre for Financial Education, it is estimated that only 27% of Indians are financially literate. Additionally, a 2023 report said only 16.7% have basic knowledge about finance and money management. This underscores the urgent requirement for a better financial education drive throughout the country. That said, platforms like Power Academy by PowerUp money helps consumers improve their financial understanding using byte-sized content that can be consumed on the go. It also provides important tools for the consumer to help plan for a lot of scenarios. For example, whether buying a house or renting one is more sensible. Or if one should pre-pay one’s loans or what kind of insurance to buy, etc.

• Inconsistent Income: It’s hard to predict cash flow and save regularly with fluctuating earnings, especially for freelancers and entrepreneurs.
• Makes Debt High: Debt is an instrument that helps bridge the gap between planning and execution, or for large expenses that an individual has not planned for. There are some debts that can be planned as well (for example a home loan) that covers for the difference between one’s income and expenditure. If one is able to plan their expenses well, they should be able to minimise the overall debt they take on.
• Lack of Savings: Without an emergency fund, individuals are vulnerable to financial mishaps. As previously stated, life is unpredictable, and an emergency might pop up at any given point in time. Savings during such trying times can help one tide over the situation without much hassle. On the contrary, however, a lack of a nest egg can lead to debt, etc.. 
• Procrastination and lack of discipline: Procrastinating starting or updating financial planning leads to missed opportunities and inadequate preparation for future needs.
• Economic Fluctuations: It might destroy the best personal financial plans if external economic factors come to bear, such as inflation, recession, or market volatility.

How is Technology Changing Financial Planning?

Digital tools and fintech have made financial planning easily accessible to individuals. The following are how technology can impact the same: 

• Automated tools and algorithms: Robo-advisors provide advice on investments using algorithms at a lower cost compared to traditional financial advisors. According to Statista, the worldwide market for Robo-Advisors is projected to experience a dramatic increase in assets under management, with a projected total value of $2,274.00 billion by the end of 2027. 
• Apps for budgeting and keeping track: Digital applications help users track their expenditures and budgeting in real-time.
• Enhanced access to financial markets: Now, through fintech platforms, investment is equitably accessible, even for non-professional investors.
• AI-powered data analytics: These furnish personalised insights and recommendations related to specific spending patterns and financial goals to raise decision-making to a higher level.
• Increased security: Advanced security technologies, including biometrics and data encryption, would provide more security.

The aforementioned points aside, PowerAge is the newest kid on the block. PowerAge is a brilliant intuitive tool that is both dynamic and automated in nature. Not only does PowerAge adapt as per your current financial standing and needs, it also aligns as per your future financial forecasts as well.

What are the Effective Tips for Your Financial Plan?

An integral part of achieving financial independence is a well-conceived personal financial plan. Here are some things necessarily considered while devising your plan:

Tip 1: Set Clear Financial Goals

Clearly state what you want to achieve with your finances, whether purchasing a home, retirement, or education savings. Ensure that the goals are specific, measurable, attainable, relevant, and time-bound.

Tip 2: Budget Wisely

One needs to have a minute budget on paper, which records one’s income and expenditures. Individuals following the budget have higher chances of succeeding in meeting financial goals on time.

Tip 3: Budget for Emergencies

Keep aside a minimum of three to six months of living expenses in some easily accessible fund that shall protect you from any sudden financial downturn. 

Tip 4: Invest for the Future

Diversify your investment portfolio and spread the risk to improve potential returns. A periodic review of investment performance, coupled with ongoing restructuring or adjustments, is necessary to ensure k

eeping pace with changing financial goals.

Tip 5: Seek Professional Advice

Consult financial advisors to design your financial plan according to your circumstances and goals. The FPSB found that more people who work with a professional financial planner feel better about their financial well-being. They report higher quality of life and more financial confidence and resilience than those who don’t. 

Conclusion

Understand the process and elements of financial planning to achieve economic security and independence. Thus, take essential steps to assess your current status, set your goals, and create a plan that you can execute. This article has explored the various components of financial planning, from budgeting and savings to investment and tax optimization. 

Besides, factor in the common challenges and the ways technology is changing personal finance. Whether you are just getting started or searching for improvements to your strategy, seek to do so with some financial planning tools or by seeking professional advisor assistance. Being proactive about matters concerning finance today helps secure your tomorrow.

FAQs

1. What is personal financial planning?

Personal financial planning ensures that an individual or household has sufficient income or resources to meet present and future expenses. It is the procedure whereby an individual or family arranges the acquisition, administration, and allocation of money. This involves banking, budgeting, mortgages, investments, retirement, tax, and estate planning. 

2. What are the key components of a financial plan?

Financial planning includes budgeting, saving, investing, tax planning, and retirement planning. All these are crucial when one wants to build financial health.

3. Can technology help in personal financial planning?

Yes, technology, particularly fintech tools like budgeting apps and robo-advisors, can enhance personal financial planning. These tools provide personalized financial insights, improve financial record-keeping, and facilitate better investment decisions.

4. What is the best way to set financial goals?

The SMART criteria are the best way to set financial goals. This method ensures that your goal is Specific, Measurable, Achievable, Relevant, and Time-bound. This increases clarity and focus, providing a greater chance of achieving your financial objectives.

5. How can I manage economic risks through financial planning?

You can better manage economic risks through investment diversification, adequate insurance, and holding sufficient emergency funds. These help avoid probable financial losses and act as a cushion in case of volatile economic conditions.