- Financial Planning Definition
- Emergency planning – the stepping stone to financial planning
- Core principles of financial planning
Financial Planning Definition
Financial planning is a beneficial tool to plan your finances so that you can achieve your goals easily. It is a step-by-step process of planning your finances in such a manner that your income can build up a corpus for your future goals.
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When talking about financial goals, the first thing to understand is what exactly these goals are. Financial goals are nothing but the different financial responsibilities of your life. They are financial needs which require funds and should be fulfilled during your lifetime.
Financial goals differ across different individuals but some of the common ones include the following –
These financial goals can be short term, mid-term or long term in nature based on when you need to fulfil them. If the goal is to be fulfilled in the coming year or two, it is termed as a short term goal, like taking a vacation. Similarly, a goal which should be fulfilled after 8-10 years would be a long term goal, like retirement planning.
While you plan for your financial goals, you should make sure that your goals are S.M.A.R.T. Do you know what is the meaning of S.M.A.R.T. goals?
The full form of S.M.A.R.T. is as follows –
S – Specific
M – Measurable
A – Achievable
R – Realistic
T – Time-bound
If a need fulfills these criteria, it can be categorized as a financial goal. Alternatively, if it doesn’t, it would not be a financial goal and planning for it would be foolish. For instance, you wanting your child to pursue international education is a S.M.A.R.T. goal but you wanting your child to study only in Harvard or Oxford is not S.M.A.R.T. because admission to such institutes is based on merit and not on financial planning.
Read more about what are goal-based savings and how can you achieve your life goals.
Emergency Planning – The Stepping Stone to Financial Planning
While identification of financial goals is the first step in financial planning, emergency planning is the foundation of a successful financial plan. Emergency planning means planning for an unexpected emergency which would cause financial loss. You should first create an emergency fund so that your financial plan is not disturbed due to an expected emergency. Emergencies are unavoidable and the wisest thing to do is to plan for them so that they do not disrupt your carefully laid plans.
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Core Principles of Financial Planning
To start financial planning, you need to identify your goals and plan an emergency fund for those challenges which life throws your way. Once you are done with these two important tenets of financial planning, you can chalk up your financial plan for your goals. When creating a financial plan, however, the core principles of financial planning should be kept in mind. These principles would help you avoid common financial mistakes and create a fool-proof financial plan for your goals. Here are the top 20 most common money mistakes people often make which you should avoid while planning your finances.
So, what are the core principles of financial planning?
There are 4 core principles of financial planning which are as follows –
|Core principles||What they mean?||Actionable|
|Core principle # 1 – Spend less than you earn||Limit your expenses so that you can save. The higher the disposable income that you have, the more can you save towards your goals and build up a considerable corpus.||
|Core principle # 2 – Pay off unnecessary debts||Bad debts can incur high interest charges and severely impact your credit score. You should, therefore, manage your debts effectively and get rid of bad debts||
|Core principle # 3 – Retirement planning||Though retirement might be a far off thing you need to plan for it over a longer tenure to accumulate an optimal corpus which can take care of the inflated expenses post retirement||
|Core principle # 4 – Incentivize yourself||You need to keep yourself motivated on your financial journey so that you can stick to the financial plan that you have made||
Financial planning is important if you want to achieve financial independence. The adore-mentioned aspects of financial planning have been explained in brief. If you want a more detailed guide into financial planning, what it means and how to go about it, you can take this financial planning course and become a pro.