Why 6 Strategies of Financial Planning?
6 Strategies of Financial Planning – why do we need it? Have you ever thought about it? Most of us do not think this, especially when we are young, when we really need it.
But sorry! Then we do not have time to think about these things…to do financial planning. With the passage of time, we begin to understand the need and importance of financial planning.
Whether you are salaried or non-salaried, whether you are associated with business or the owner of a company, everyone needs a financial planning.
Today I am writing this post for those who are either beginners or who have ignored financial planning till date. Let us now understand the 6 strategies of financial planning as a questionnaire from the beginning.
What is Financial Planning?
Financial planning is a way of creating an action plan to meet our current and future financial needs according to our financial situation. Financial planning is important. Even the best financial planners around the world use 6 strategies of financial planning.
What are the Financial Needs of Individuals?
Humans are the most civilized living beings on earth. Which requires good food, shelter and basic goods to survive. All of these require money.
You can realize these needs in different ways. Some needs are of short duration and some are needed after a long time. It is important to know all types of needs for better financial planning.
- Daily needs – These are the requirements we need every day.
- Medical Needs – Needs treatment after falling ill.
- Emergency Needs -Needs which are associated with very bad times of life.
- Needs of Children Education – The best education of children is one of your priorities.
- Needs of own home – I think everybody needs a beautiful house.
- Needs related to marriage of children
- Needs after retirement
- Needs when the earning head of the family / survivor is not alive
- Extra needs we feel– needs of different life style related things like T.V., Computer, A.C., Freeze, Car, Visiting overseas or elsewhere. Actually these are wants.
Of course, some of these needs vary from person to person. But there are definitely requirements.
What are the Sources to Meet Financial Needs?
We meet these requirements from various sources of finance. These can be –
Paternal property (land, house, flat, shares, bank balance etc.), regular income (earned as salary from government or private job), daily income / daily wages, job based on occupation, farming and other passive income.
Do all Succeed in Meeting Financial Needs?
No, not all are able to meet financial needs. According to one study, the percentage of financial success is only 5–10%. Most of us get stuck in the rat race.
What is a rat race?
Human life follows a cycle. There comes a time when he/she has to carry out his/her own responsibilities as a mother / father. This is the beginning of his/her financial life. And then it is most likely to get stuck in the rat race if it does not pay attention to financial planning.
“A rat race is an endless, self-defeating, or pointless pursuit. The phrase equates humans to rats attempting to earn a reward such as cheese, in vain. It may also refer to a competitive struggle to get ahead financially or routinely.
The term is commonly associated with an exhausting, repetitive lifestyle that leaves no time for relaxation or enjoyment.”
Source: Wikipedia
What is Importance of Financial Planning?
Needless to say how much planning is important for success in any work. Fulfilling financial needs is one of the main goals of our life. There are many benefits of financial planning, such as –
- You can control your non-urgent expenses by making a financial plan. Because avoiding wastage of money is also a kind of income.
- In the course of financial planning, you get to know what the importance of income, expenses, savings and investment is. You can invest your savings money in a better way.
- Financial planning helps you to meet proper tax planning, retirement planning, proper insurance plan and all the big and small financial goals.
- There is a good understanding of the outflow and inflow of money. Which saves you from debt trap.
- You get to know better that what is the difference between circle of concern and circle of influence. It saves you from the trap of consumerism.
- Financial planning motivates you for asset buildup. You know the difference between assets and liabilities.
- Financial planning helps you achieve financial independence. And in the end you are able to live a wonderful life with good mental and physical health.
Best 6 Strategies of Financial Planning
The 6 strategies of financial planning are completely logical and it is up to you how honest you are to follow those steps. This is similar to the decision you make every day. But the effect of financial decision is much deeper. All the steps mentioned here are strategies in themselves.
Strategy 1: Setting Financial Goals and Objectives
First of all, you take a pen and note all the goals that you want to achieve in your life. It is possible that some of them may not need a goal. But you also write it, since you want to get it.
After making the list, analyze your goals one by one. Which goal is currently important? Which goal will be the priority later? Decide the objectives of all the goals.
Recognize the difference between needs and desires from those goals. You should identify your current expenses. Then think about comprehensive savings for future security and set goals to invest the money saved.
Strategy 2: Evaluate Where You Stand Financially
This is a difficult task because you are facing yourself. After setting the goals you should first prepare a list of assets and liabilities you already have. Your liabilities column should be small and the column of assets should be large.
Assets tend to increase your income over time while liability reduces income.
Write the current values of all of them. Keep an eye on money inflows and outflows. For that use flow diagrams. All these steps enable you to evaluate your current financial situation correctly.
Now on the other hand list all your needs and desires based on value, time horizon and priority.
Strategy 3: Analyze the Data You’ve Gathered
This is an important step where you have to thoroughly examine all the data collected. You require data analysis to check their feasibility. Pay attention on the priorities and values which seems not to be fulfill in certain time frame.
Use financial calculator to ease your calculations. This will enable you to know how much amount to save and invest to achieve a certain goal.
For example, if you want your home after 20 years from today and if it costs 50 lakh, then a financial calculator will help you know how much money you should save and invest every month.
If you find your present income is not enough to achieve some goals. Then follow next step.
Strategy 4: Identify Alternative Sources of Income
Your regular income is a major source of meeting your needs. But in most cases it has been seen that they are not sufficient. In such circumstances it becomes important to look for some alternative source of income.
There are plenty of opportunities to make money by a side hustle which can be an active or passive source of income. Identify it according to your interest, ability and convenience.
I have written some posts in this link. You should read them- What is Mutual Fund?and High Dividend Paying Stocks with Good Fundamentals.
Strategy 5: Develop and Implement Final Plan
After following the above four steps, you can easily develop the final plan. This is not a complicated mathematical calculation. This is a matter related to the future of you and your family. Which you do with seriousness. You also get to know a lot about yourself.
Try to implement the financial strategies created gradually and one by one. Do not take a headache in a hurry to achieve it.
Strategy 6: Periodically Review and Revise
There is a chance of uncertainty everywhere.
Everything does not happen according to us and you. Once you start implementing it after doing financial planning, you might not get 100% results. But you have progressed towards success.
Do not be disappointed. From time to time (almost once in a year), you keep reviewing these 6 strategies of financial planning. And if you feel necessary, modify it.
Financial Planning Example for Individuals
I am sure, people who follow these 6 strategies of financial planning and even though they make some mistakes, are always in a better position than those who do not make a financial plan.
I would be happy if you comment or ask to clarify any doubts.
Some credit goes to: https://www.thebalance.com/
