Buying the perfect home, giving our kids a good education, and maybe even retiring early and travelling the world. We all have our dreams. But what does it take to turn such dreams into reality? Is saving money every now and then enough? Probably not. These goals need a clear plan. One that looks at where you are today, where you want to go, and how you can get there. That’s exactly what financial planning is all about. This process covers different facets of your financial life, like how much you earn, what you spend, where you invest, how you pay taxes, and how well protected you are from financial emergencies. Let’s understand this process by looking at the various types of financial planning and how they can set you up for long-term success.
1. What Is Financial Planning?
Financial planning is a holistic process that brings together the various elements of your financial circumstances, like your income, expenses, savings, investments, and liabilities and creates a clear strategy to help you achieve your long and short-term goals. Everyone has a unique financial situation, so it is vital to ensure your financial plan reflects yours perfectly. This means accounting for not just your goals, but also your risk tolerance, income, age, responsibilities, savings, investments, assets, and debt. This lets you build a plan that’s realistic and aligned with your profile.
You can create a plan yourself, or with the help of a financial consultant. There are many different types of financial management, so covering every base can be hard when you’re doing it alone. Later in the article, we’ll see just how many moving parts are involved. The advantage of doing it under professional guidance is that experts bring years of experience, knowledge, and objectivity to the table and help you cover everything.
2. Why Is Financial Planning Important?
The many types of financial planning bring together different aspects of personal finance to help us achieve our goals. Here are some reasons why you should consider planning:
Maximises Returns While Minimising Taxes
Investment and tax planning help you get better returns and save more in the long run. For example, a mutual fund investment planner might suggest investing in high-growth options like ELSS, which not only offer the potential for high returns but also reduce your taxable income.
Gives You A Better Understanding Of Your Financial Circumstances
Knowing how much we earn and what we have in our account is one thing, but tracking where all that money goes, following a budget, and living within our means, that’s different. When you keep a sharp eye on your income, expenses, savings, liabilities, and investments, you get a clearer picture of your finances at any given point in time. This makes you more adaptable to changing circumstances and helps you make better decisions.
Efficient Financial Management
Since we have limited resources, we need to be efficient to get the most out of our money. Financial planning helps you do just that.
Personalised Investing
One’s investments should mirror one’s goals, risk tolerance, and investment horizon. Investment planning is one of the most crucial types of financial management that ensures your money is working in the right direction. It helps you find the right balance between risk and reward, so you’re neither being too conservative nor taking unnecessary risks. For beginners, mutual fund SIPs can be a great start as they’re affordable, flexible, and offer many advantages.
Establishes Priorities
We juggle many different duties, like paying off loans, making SIP instalments, managing expenses, and supporting family. A financial plan helps you organise your priorities. You understand better what needs attention first, what can wait, and how to balance everything without compromising your goals.
Increases Chances Of Achieving Financial Goals
If your goal is to build a fund for your child’s wedding, tax planning can indirectly help you achieve that by allowing you to invest every rupee you save on taxes. Similarly, protecting yourself, your loved ones, and your investments from unforeseen situations can be accomplished using insurance planning. Financial planning gives each of your goals the attention it deserves. These different components come together and increase the probability of realising your financial dreams.
Keeps You Safe From Financial Emergencies
Every now and then we deal with emergencies like expensive medical bills and car repairs. A budget generally does not account for such expenses. Financial planning encourages you to set aside an emergency fund specifically for these unforeseen situations. It also includes reviewing your insurance coverage to make sure you and your loved ones are protected from any big financial challenges.
Gives You Peace Of Mind
When not managed properly, our finances can be a big source of headaches. A plan in place brings order to the chaos. It takes a huge mental load off your shoulders, which at the end of the day, is priceless.
3. Types of Financial Planning
Different types of financial planning focus on different areas of personal finance. These include:
Budgeting
A budget is a framework that mainly details how much money’s coming in, how much is going out, and what you’re saving. The point of creating a budget is first to ensure that you’re not overspending, and second, to ensure you’re saving something. In general, there are three parts of a budget:
- Needs (Essential Costs): These are your must-pay expenses, like rent, groceries, electricity and water bills, insurance premiums, and EMIs.
- Wants (Non-Essential Costs): These include things that make life enjoyable but aren’t strictly necessary, like shopping, hobby expenses, ordering food, etc. These help you figure out where you can make cuts.
- Savings: The remaining amount is savings. A good rule of thumb is to save first, spend later.
A popular budgeting guideline is the 50/30/20 rule, where you allocate 50% of your income to needs, 30% to wants, and save the remaining 20%. You don’t have to follow this rule strictly. Your budget should be realistic so it’s easier to follow and you don’t abandon it midway. Too many cuts from your wants can lead to misery, so initially you only need to ensure that you save something and don’t live beyond your income.
Debt Management
Be it for education, cars, or a home, loans are a part of life. But it’s important to keep them under control as they can get out of hand quickly. Financial planning helps you avoid unnecessary borrowing and figure out the best ways to repay these loans without stress. The quicker you do that, the sooner you free up funds that can be used for investing.
An underrated benefit of good debt management is improving your credit score. A strong credit score not only helps you get loans more easily but also gives you access to lower interest rates and higher credit limits.
Emergency Planning
Emergency planning is often among the first things an Financial planner recommends doing. Here, you focus on building an emergency fund, which is a separate reserve of cash held in a liquid account only to be used during emergencies. For example, if you are hit with repair bills, medical expenses, or even a loss of a job, an emergency fund will act as your safety cushion. These expenses are unexpected so they can’t really be budgeted, which is why having a separate fund works best. So, what happens when we don’t have emergency savings? Well, you might have to:
- Dip into your savings
- Stop your SIPs
- Redeem your investments prematurely
- Take on high-interest debt
All of these can set you back and also cause a ton of stress. Emergency funds give you some breathing space to manage these situations calmly. Generally, it is recommended to have at least 6 months’ worth of essential expenses in this fund, parked in a liquid and low-risk option so that you can access it quickly without penalties.
Investment Planning
Now we come to the exciting part. Investment planning is one of the most important types of financial management as it is directly tied to your goals. If you only save money, it will lose its value due to inflation, and not grow. You need to make your money work for you as hard as you work to earn it. Broadly, this type of planning takes into account three things:
- Your goals: The dreams you want to realise
- Your risk tolerance: The amount of risk you can bear in the pursuit of your dreams. It depends on several factors like income, age, savings, liabilities, and financial responsibilities.
- Your investment horizon: How long you’re willing to stay invested before you need to use the money.
You select your mix of investments and their allocation based on these three factors. It’s important to diversify across different assets so that your portfolio isn’t overly dependent on the performance of one asset class. Also, since your financial situation, goals, and market conditions don’t stay the same forever, you need to review your portfolio at least once or twice a year. Expert financial advisory services can be incredibly helpful for new investors as they can help you create a customised strategy and ensure that you stay on course toward your goals.
Insurance Planning
An emergency fund can help you deal with short-term surprises, but what about larger, long-term risks? Insurance planning protects you and your family from emergencies that could otherwise wipe out years of savings. It helps you cover:
- Health: As you know, medical expenses are touching the sky, and a single hospitalisation can set you back by quite a lot. With a good health insurance policy, you can get quality treatment without having to dip into your savings.
- Life: Having life insurance is a must for the family’s main earner. It ensures that the loved ones can maintain their lifestyle, pay off loans, and pursue their goals even in the absence of the breadwinner.
- Assets (Like Home, Car): Insurance for your assets protects you against damages, theft, or disasters.
Having good policies in place brings mental peace, but can also save taxes. Together, emergency and insurance planning lay the foundation of financial security. If you’re looking for the best financial planners in bangalore, your search ends here! Contact our experts today and take control of your financial future!
Tax Planning
This part of financial planning deals with minimising one’s tax liabilities while fully complying with the law. A tax consultant studies your income, expenses, and investments to create strategies that help reduce your tax burden. This could include recommending tax-saving investment options under Section 80C (such as ELSS, PPF, or SCSS), advising on the ways to structure your salary, and helping you claim deductions and exemptions under the Income Tax Act. Laws can be confusing, and often many taxpayers aren’t even aware of the deductions for which they qualify. With tax consultation services, you’ll not be paying any more tax than necessary.
Retirement Planning
If you want to maintain your standard of living during retirement, or even pursue the dreams you put on hold during your working years, having a solid retirement plan is non-negotiable. A good plan helps you estimate how much you’ll need, when you’ll need it, and how you can amass the desired amount. It accounts for factors such as rising medical costs, inflation, increasing life expectancy, and your goals for retirement. The sooner you start, the better. Here’s an example that shows why:
Let’s say Amit starts his journey in his mid-20s, and Raj in his mid-40s. Amit has a longer investment horizon, so if they both invest the same amount till they’re 60, of course, Amit will accumulate a much bigger amount. But that’s not all. Amit’s age gives him the opportunity to stay invested in risky, high-growth assets like equity funds for a longer period. Since he has time on his side, he can ride out short-term market volatility and benefit from compounding interest. On the other hand, things are not so easy for Raj. He will need to play it safer as his risk tolerance will not allow him to stay invested in riskier assets in his 50s. His main goal then would be to preserve what he has and take a conservative approach.
Estate/ Legacy Planning
This is one of the more overlooked parts of financial planning, but it is crucial nonetheless. Estate planning ensures that when the time comes, your wealth is passed on smoothly to your loved ones, the way you want it distributed. The most common ways to go about this are by assigning nominees, creating wills, and setting up trusts. These provisions prevent legal disputes among heirs. Trusts are often the choice of high-net-worth individuals, and can especially be useful for cases beyond estate planning, such as asset protection and tax benefits.
4. Tips for Effective Financial Planning
- Live Within Your Means: You can’t save or invest if you overspend, yet many people struggle with this simple step. These days especially, with sales, online convenience, and lifestyle inflation, it’s become incredibly easy to overspend without even realising it. Live within your means by spending carefully without exceeding your income.
- Calculate Your Net Worth: Net worth is the difference between your total assets (investments, properties, savings, cash, etc.) and total liabilities (loans, credit card debt, etc.). Once you know where you stand financially, you’ll find it easy to assess how your wealth is growing over time.
- Use the 50/30/20 Budget Rule: The rule is simple: 50% of your income should go to covering necessary expenses (bills, groceries, rent), 30% can be used for discretionary spending (like dining out or streaming subscriptions), and the rest should be saved. You can tweak it according to your financial situation. The point is to have a structure that allows decent sayings.
- Don’t Take On Unnecessary Debt: Debt, especially the quick high-interest debt on offer these days can quickly spiral out of control and derail your financial plan. That said, not all debt is bad. Ideally, you should only borrow when you need to, and only what you can repay comfortably .
- Set SMART Goals: The idea behind SMART (Specific, Measurable, Achievable, Relevant, and Time-bound) goals is that each goal should have all five of these qualities to be effective.
- Prioritise Savings: Gone are the days when one used to think of savings as the money left after spending. When you receive your monthly income, make it a point to set aside some savings first. Think of it like a payment to your future self.
- Discipline Is Key: Having financial discipline is the key to building long-term wealth. This includes many aspects, such as sticking to your budget, avoiding impulsive spending, and investing regularly.
- Ensure Your Investments Reflect Your Growing Income: As your income grows, so should your savings and investments. An sip investment planner might recommend investing through Step-up SIPs as they not only encourage regular and disciplined investing but also help you keep up with inflation.
- It’s Never Too Early To Start Planning For Retirement: If you’re in your 20s, you may feel that planning for retirement is a far-off concern, but that may not be the best way of thinking. An early start gives your money more time to reap the rewards of compounding interest, helps you achieve goals faster, and gives you the option to retire early.
- Emergency Funds Are Powerful: Financial emergencies can force you to liquidate your investments and even pressure you into taking on high-interest debt. A 6 months’ worth of reserve can help you avoid dipping into your savings and keep your financial life somewhat normal while you recover.
- Don’t Overlook Estate Planning: Legacy planning is among the most important types of financial planning. If you’re retired or are approaching retirement, you should look into how your wealth will be managed and distributed after your lifetime. If you want to ensure your hard-earned wealth is passed on smoothly and according to your wishes, you should consider getting a will or setting up a trust to reduce taxes, legal battles, and conflicts within your family.
- Track Your Plan Regularly: Your goals, financial situation, and market conditions will change with time, so your plan should reflect those changes. You should review your plan every six months or at least once a year to make sure everything is on track.
Conclusion
Financial planning is a comprehensive process that helps you manage different areas of personal finance. With a plan in place, you’ll be in a great position to achieve all your financial dreams while staying prepared for any emergencies that come your way. A certified financial planner can help tie together the various types of financial planning into a single, personalised strategy that works for your income, goals, and risk tolerance.
FAQs
1. What Are the Types of Financial Planning?
The main components or types of financial planning are:
- Investment Planning
- Retirement Planning
- Goal Planning
- Debt Management
- Tax Planning
- Emergency Planning
- Legacy/ Estate Planning
- Insurance Planning
2. How Often Should I Review My Financial Plan?
You should review your financial plan every six months or at least annually. Also, a good time for review could be whenever your financial situation or market conditions change significantly. For example, if you change jobs, receive a bonus or an inheritance, get married, or have a child, your goals, priorities, and responsibilities can change. Similarly, if there are major changes in market conditions, you may be forced to reassess your investments and risk exposure.
3. What Are Common Mistakes to Avoid in Financial Planning?
You should avoid these financial planning mistakes:
- Not building an emergency fund.
- Not following a realistic budget and living beyond your means.
- Thinking professional advice is only for the wealthy.
- Delaying investments.
- Not getting insured.
- Investing on whims and not according to your goals, risk tolerance, and investment horizon.
- Ignoring diversification.
- Not reviewing your plan regularly.
- Thinking you’re too young for retirement planning.
- Ignoring the tax implications of your investments.
- Spending first and saving later.
- Taking on too much debt.
4. Why Is Tax Planning Crucial in Financial Management?
Paying tax is a yearly obligation. If you avoid or evade taxes, you could end up in serious trouble with the Income Tax Department. We all want to save as much of our hard-earned money as possible, and tax planning helps with that. It ensures full compliance with the law while also minimising our tax liabilities. Tax savings can then go towards investments which will ultimately help you realise your financial dreams faster.
