What Does Financial Planning Mean?
Financial planning, being a crucial part of financial managementdetermines the budget, objectives,investment procedures, risk analysis and Investment schemes &policies to deal with the financial activities of an investor. In a nation like ours, where financial education is popularized next to none, most investors start their investment journey randomly without any financial planning whatsoever. However, financial planning plays a critical role determining the fate of an investor.
A Good Financial Planning Always Depends On
Determination of objectives:
It is the first and foremost step towards financial planning. Determining your financial objectives helps an investor to get a clearer picture of his/her exactfinancial wants to be achieved after a given period of time. The investors must determine their financial objectives by categorizing them in accordance to tenure. For instance one may use this:-
- Ultra-Short Term Objectives: Less Than 1 year
- Short Term Objectives: 1-3 years
- Mid Term Objectives: 4-6 years
- Long Term Objectives: 7-12 years
- Very Long Term Objectives: Over 12 years
Determinationof current net worth
Once the objectives are all set, it’s time for the investors to realize their net financial worth. This step is important as it helpsdetermineinvestors’ current financial status and determine the capital value that they can invest in a given time. The current net worth of an investor can easily be determined by simply subtracting the value of the cumulative liabilities from that of the cumulative investments made.
Risk Profile Assessment
Upon determining their current worth, investors need to keenly evaluate their respective risk profile by considering multiple factors such as investors’ age, current income, net worth, capital expenditure capability and risk tolerance. This step is utterly significant as it helps to determine the capability of an investor to take risk in order to gain higher returns.
Determination Of Funds & Schemes To Invest Upon:
This is meant to be the final step before an investment is made. The investors, upon deliberately determining their respective objectives, current net worth and assessing risk profile need to finalize the schemes that can help them acquire their desired objectives while catering to their current scenario of investment capabilities.
When it comes to investments, there are numerous options to choose from. Nonetheless, following the aforementioned steps will definitely ensure safe and usually higher returns on the investments made.