What is Financial Planning?
Financial Planning includes all the activities that apply general management standards to the financial resources of a firm such as planning, directing, organizing, procurement of funds, investment, and return of the funds. In this article, students will learn about the meaning, objectives, and features of financial planning.
Financial Planning is one of the major planning that is required to be conducted by the management. Financial Planning includes all the activities which are related to the procurement of funds, investing those funds, and the return expected from the investment done. Financial Planning also ranges from tax planning which is an important activity. This planning is very important for a business to function, in this regard we have initiated the discussion on this topic ‘Financial Planning’ which is to be studied in greater detail. The scope of this topic is vast hence for a conceptualized study this is to be referred to.
Definition and Meaning
Financial planning is defined as a document that has records of a business owner or firm's financial situation along with planning on the spending of money to achieve a certain goal by working by a well-devised plan. Financial planning may be made independently or by an experienced planner.
It is basically a financial budget plan, which helps organize the business and includes a set of goals that are supposed to be followed by the firm or business owner to save and spend accordingly. It helps distribute various monetary expenses such as rent, while at the same time saving some amount of money as short-term or long-term savings.
Financial Planning is the process of estimating the capital requirement and also determining the competitive elements required for financial planning. This is a plan which has been defined as a document that contains a person's current money situation with the long-term monetary goals, the strategies to achieve those goals on the basis of the current fund. A financial plan may be devised and drafted independently or with the assistance of a financial planner. The first step in the creation of a financial plan is to involve collecting the numbers from the web-based accounts into a document or a spreadsheet.
This type of planning is also known as an investment plan as it manages various types of liquid and other assets that involve risk and uncertainty. Financial planning done by individuals is not as risky as they do not involve huge investment or undertaking, such as funds kept separate for college or university, estates, healthcare, or retirement.
Financial Planning in Financial Management
A financial plan is an overall evaluation of an individual's current pay and future financial state by using the current known variables to predict the future income, asset values, and withdrawal plans. Financial Planning includes the budget which organizes the business and the individual finances and at times includes a series of steps or specific goals for spending and saving for the future. This plan distributes the future income to various types of expenses such as rent or utilities and also reserves some income for the short-term and long-term savings as well. A financial plan is sometimes referred to as an investment plan, while personal financing focuses on specific areas like risk management, estates, colleges, or retirement.
Objectives
There two main objectives of financial planning which are given below:
Ensuring Availability of Funds When Required: The foremost and most important objective of financial planning is to keep in check that funds are available in cases of emergency or whenever it is required for use. Sufficient funds should be available with the firms for various purposes.
Check Unnecessary Fundraising by the Firms: Insufficient funds are just as bad as surplus funds. Idle money will only result in a loss for a firm as against investment. Therefore, proper allocation of funds is a very important part of financial planning.
The Objectives of Financial Planning are Enumerated as Follows -
To Ensure Availability of Funds Whenever Required:
The foremost objective of financial planning is assuring that sufficient fund is available with the company for different purposes.
To Check if the Firm Raises the Resources Unnecessarily:
Excess funding is as bad as inadequate funds. If there is a surplus amount of money, then the financial planning is to invest it in the best possible manner as keeping financial resources idle is a great loss for an organization as it will be in vain.
Features
There are a number of features of financial planning that are important for firms and individuals. These are listed below:
Foresight: A plan made without foresight will only result in a disaster. Foresight is needed in planning for estimating risks and the need for liquid and other assets. It may not be 100% accurate but it should be able to give an estimate of the future risks.
Flexibility: A plan made should be flexible as it will help in the future to make adjustments according to the needs.
Optimal Usage of Funds: A financial plan should be able to utilize idle money and assets so that they can prove to be fruitful in the future. It does not involve funds kept aside for unforeseen circumstances but the assets that could be otherwise utilized.
Simplicity: Financial planning should be simple in terms of structure and should be able to provide a sound allocation of resources that can be easily understood even by a layman.
Liquidity: It is also a very important aspect of financial planning which involves keeping current assets in the form of money. This will help in easy allocation and payment of various kinds like salary, fees, and other kinds.
Features of Financial Planning is Enumerated as below -
Simplicity: A sound financial structure must provide a simple financial structure that could be managed easily and understandable even to a layman.
Foresight: Foresight must be used in planning to know the estimate and the need for capital which may be estimated as accurately as possible. A plan visualized without any foresight will outcast disaster for the company.
Flexibility: Repeating the financial adjustments becomes necessary hence its flexibility is required so that it is easily adaptable
Optimum use of Funds: Capital should not only be adequate but should also employ productive effects. A financial plan should prevent wasteful use of the capital, thus avoiding idle capacity to ensure proper utilization of funds to earn the capacity in an enterprise.
Liquidity: Current assets are to be kept in the form of liquid cash. Cash is also required to finance purchases, to pay the daily needs like paying salaries, wages, and other incidental expenses.
Conclusion:
Financial Planning is an important aspect of the individual as well as business life. This article gives you an insight into what financial planning comprises and what are its key aspects.
FAQs on Financial Planning: Key Objectives
1. What are the 5 steps of financial planning?
The 5 steps of financial planning form a clear process to help you achieve your financial goals with better organization and focus. Each step builds on the previous one, ensuring a thorough approach to all aspects of your financial life. The steps include:
- Establishing your financial goals – Identify what you wish to accomplish, such as buying a house or saving for retirement.
- Gathering relevant financial information – Collect details about your income, expenses, assets, and liabilities.
- Analyzing your financial situation – Review your current finances to find any gaps or shortfalls.
- Developing and implementing a plan – Create strategies to meet your goals and put them into action.
- Monitoring and reviewing the plan – Regularly track progress and adjust as needed.
2. What is the 50 30 20 rule in your financial plan?
The 50 30 20 rule is a simple budgeting method that helps individuals manage spending and savings in a balanced way. It divides your after-tax income into three main categories for easier financial planning. According to the rule:
- 50% is allocated to needs – bills, housing, groceries, and essential expenses.
- 30% goes toward wants – entertainment, eating out, hobbies, and other non-essential spending.
- 20% is saved or used to pay off debt – building emergency funds or reducing credit balances.
3. How much should I pay for a financial planner?
The amount you pay for a financial planner depends on the services you need and the advisor’s fee structure. Financial planner costs typically range from $1,000 to $3,000 for a one-time comprehensive plan, or 0.5% to 2% of assets under management annually. Many planners also charge hourly rates, often between $150 and $400 per hour, depending on their experience and specialization. Before hiring a financial advisor, always ask about their fee structure—some charge a flat fee, some are commission-based, and others use a combination. Comparing planner fees and understanding exactly what’s included ensures you get fair value for the advice you receive.
4. What is meant by financial planning?
Financial planning is the process of organizing and managing your finances in order to achieve personal life goals, like saving for retirement, education, or buying a home. It involves analyzing your current financial situation, setting objectives, and creating actionable strategies for budgeting, investing, and risk management. By using comprehensive financial planning, individuals can anticipate future needs, prepare for unexpected expenses, and make informed decisions about spending and saving. Proper financial planning helps ensure you stay on track as your financial situation changes over time.
5. Why is financial planning important?
Financial planning is important because it provides direction and meaning to your financial decisions. With a detailed financial plan, you can allocate resources efficiently, reduce financial stress, and prepare for the unexpected. Some key reasons for its importance include:
- Setting clear financial goals and roadmaps to achieve them
- Managing risk and protecting against financial setbacks
- Building wealth and ensuring long-term security
6. How do I start financial planning for beginners?
Starting financial planning as a beginner involves several basic steps to gain control over your finances and set the foundation for future success. Begin by tracking your income and expenses to understand where your money goes each month. Next, outline your short-term and long-term financial goals, such as creating an emergency fund or saving for a big purchase. Build a realistic budget and stick to it, making sure to allocate funds for savings and debt repayment. If desired, consult a certified financial planner for personalized guidance. Taking these steps can lead to better financial management and growth over time.
7. What is the difference between financial planning and budgeting?
While both financial planning and budgeting are essential for money management, they have different purposes. Budgeting is the process of creating a plan to track income and expenses on a monthly or annual basis, ensuring you live within your means. Financial planning, on the other hand, is a broader, long-term process that looks at your entire financial picture—goals, investments, insurance, and estate planning. In summary, budgeting helps you manage daily spending, while financial planning guides you toward achieving life goals and building wealth over time.
8. What are common mistakes people make in financial planning?
Common mistakes in financial planning can hinder your ability to reach financial goals and may even create unnecessary risks. Some frequent errors include:
- Failing to set specific goals and timelines
- Not tracking income and expenses closely
- Ignoring emergency savings or insurance coverage
- Neglecting regular plan reviews and updates
9. How often should you review your financial plan?
You should review your financial plan at least once a year or whenever a major life event occurs, such as changing jobs, getting married, or having a child. Regular financial plan reviews help ensure your strategies remain aligned with your current goals and financial situation. During these reviews, assess your progress, update any changes in income or expenses, and adjust your investment and insurance coverage as needed. Frequent financial reviews help you stay on track and quickly respond to any significant changes in your personal finances.
10. What should be included in a comprehensive financial plan?
A comprehensive financial plan includes key elements that work together to build and protect your wealth. Components of a strong financial plan are:
- Budget and cash flow management
- Goal setting (short and long-term)
- Debt management strategies
- Investment planning
- Insurance and risk management
- Retirement and estate planning
11. Can financial planning help with debt management?
Yes, financial planning plays a crucial role in debt management by providing structured approaches to paying down debt and preventing future problems. Through financial planning, you can assess the types and amounts of debt you carry, develop strategies to pay them off efficiently, and integrate debt repayment into your overall plan. Methods might include prioritizing high-interest debts, consolidating loans, or setting monthly payment targets. Effective debt management through financial planning helps reduce financial stress and frees up resources to reach other financial goals.
