Financial planning is assessing your current wealth against your current needs and the ways to grow your wealth to meet your future needs. In other words, it is an exercise to ensure that you meet all your financial goals. You could argue that nobody has seen the future. So why do we need financial planning? To answer that, we will explain the importance of financial planning.
Financial planning helps you to identify needs, wants, fixed expenses and discretionary expenses. You can compare the expenses with your income and decide which investments will increase them. Growing your income is a progressive activity, and so is financial planning. Ideally, you wouldn’t want to stagnate your income growth as your fixed expenses, and the necessities will increase over time. You will have to curtail your discretionary expenses. In the long run, this approach is not sustainable. Proper financial planning will help you avoid this situation altogether. While financial planning focuses on growing income, it could also help in minimising expenses and reducing taxes.
So, how do you go about financial planning? Firstly, you should calculate your net worth. You may subtract the total monetary value of everything you owe from everything you own. Ideally, this should be a positive figure. The higher the net worth, the better is your financial position. The next step is to total all your incomes and subtract all your known expenses. That should again be positive. Otherwise, your costs will erode your wealth considerably in the long run.
The third step is to establish your financial goals, their monetary values, and their timelines. For example, you wish to buy a car costing Rs. 10 lakhs after five years. In this case, you need investments that will earn you Rs. 10 lakhs in the next five years. Eventually, you should tabulate all these items and apply them in the golden equation of wealth, as explained in earlier chapters.
Financial planning is individualistic as each golden equation element can be adjusted according to your needs, earning potential, risk-taking ability, and financial goals. We would recommend everybody to develop their own financial plan and monitor it closely. You may consider hiring a trustworthy Certified Financial Planner to help you with it.