Anupama Nair
www.mediaeyenews.com
Financial Planning is merely the process of estimating the capital required and determining it’s competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise.
“Financial Planning is just the process of framing objectives, policies, procedures, programs and budgets regarding the financial activities of a concern. This ensures effective and adequate financial and investment policies. The importance of financial planning are:
- Financial Planning helps in ensuring a rational balance between inflow and outflow of funds so that stability is maintained.
- Financial Planning ensures that the suppliers of funds are easily investing in organizations which exercise financial planning.
- Financial Planning helps in making growth and expansion programs which helps in long-term survival of the company.
- Financial Planning reduces qualms with regards to changing the market trends that can be faced easily through enough funds.
- Financial Planning helps in reducing the reservations which can be a hindrance to growth of the establishment. This helps in ensuring stability and profitability in concern.
One of the most important functions of finance planning is to intelligently allocate capital to long-term assets and the activity is also known as capital budgeting. It is so necessary to allocate capital in those long-term assets so as to get maximum yield in the future. As the future is uncertain, there are difficulties in calculation of the expected return. Along with uncertainty comes the risk factor, which has to be taken into consideration. This risk factor plays a very significant role in calculating the expected return of the prospective investment. So, while considering the investment proposal, it is important to take into consideration both expected return and the risk involved.
Financial planning is a broad umbrella that covers a number of topics like:
Budgeting:
Budgeting is one of the most important tools for financial planning. A budget is a plan on how to spend the money you earn. You need to write a planned budget that allows you to see exactly where your money is going and help make better decisions about how you spend your money. When you consciously think about budgeting decisions, you gain a lot more control of how you spend your money.
One of the main challenges with not having a detailed budget is being faced with so many financial decisions and trying to keep track of everything. This leads to overspending and debt, and makes financial planning for the future more difficult.
Tracking Expenses:
The key part of budgeting is tracking expenses. This tracking includes keeping close tabs on your non-essential expenses, such as clothing, dining out, travel, or entertainment. If you're spending too much on non-essentials, you may not be leaving much left over to save each month, and for sure saving matters, especially when it comes to creating an emergency fund, that could be used in the times of need.
The emergency fund is a go-to pool of cash you can rely on when an emergency or an unexpected expense comes your way. Having emergency fund in hand can keep you from going into debt, as many people learnt a valuable lesson during the time of Corona.
Debit and Credit:
Financial leverage, or using credit and taking on debt isn’t necessarily a bad thing. However, there are two kinds of debt — good and bad debt.
When you borrow money to purchase a home, you may be taking on a lot of debt, but lower interest rates and the purchase of an asset can increase in value is considered an acceptable form of debt. The same goes for student loans since you're financing a degree that could increase your earning potential, often at a low-interest rate.
On the other hand, going on a shopping spree at the mall using a credit card that has a 24% annual interest rate without paying it off in full is bad debt. You're buying things that don't grow in value, and you're paying steep interest to buy them if you carry a balance on your card.
Saving for retirement:
With fewer companies offering full pension plans and the uncertainty of Social Security, it's become more important than ever to save and plan for your retirement. Unfortunately, many people feel that they don’t have enough money left over each month to save. Whether you are just out of college and have 40 years until retirement or you plan on retiring next year, it is never too late to plan and maximize your retirement fund. Ideally, you should be aiming to save 10% to 15% of your income each year for retirement. But, if you can't do that, save in VPF along with your normal PF, and then, work on increasing your contribution amount each year.
Insurance
When you've created a budget, cut your expenses, and eliminated your credit card debt, and now you're saving for retirement, you are doing great. Those are all smart money choices to make, but there's one more important aspect of your finances that you need to consider – insurance. Insurance matters because you work hard to build a solid financial stats for you and your family, and it needs to be protected. Accidents and disasters can and do happen, and if you don't have the right insurance, it could lead to a financial ruin.
So, make right choices and invest safely.
