If we look at the current scenario, the world is changing at a high pace and Financial planning has gained so much importance. It is a comprehensive process to manage your resources aiming to achieve long-term goals. It involves setting up goals, observing available financial resources and developing plans through maximum optimization of resources. 

If you are looking for a beginner’s guide towards such kind of planning, this article will elaborate on Financial planning, its core elements, benefits, steps to start your financial planning and tips for beginners.

What is Financial Planning?

Financial planning is a set of plans that empowers you to achieve your goals through optimized use of your limited resources. If you are a business person, entrepreneur, manager or student, financial planning is very crucial to managing your income, controlling expenses, and building your assets.

Financial planning assist you make informed decisions about your money, reduce financial stress, and achieve financial security. Further, it leads to a happy business and personal life all the time.

Core Elements of Financial Planning

We will discuss key points of financial planning. Financial planning starts with setting up a financial objective individually or for your business. We will also discuss the importance of budgeting keeping in view your resources and expenses. Cash flow management is key to success. Risk analysis and profit analysis are also very crucial elements of a successful financial planning.

1. Retirement Plan:

For individuals retirement plans matter the most. It helps you to keep your funds in hand after retirement. An efficient plan enables you to generate extra income from your savings through your service. You may enjoy your post-retirement life having enough funds to spend on your family and grandchildren.

2. Financial Objectives:

The first and foremost element of financial planning is setting up your financial objectives. Financial planning is fruitless without setting up your financial objectives. Financial objectives can be long-term or short-term to fuel your long-term objectives.

For example, if you are setting a long-term goal to earn $1,000,000 in the next 10 years or a short-term objective to earn $200,000 every year.

3. Budgeting:

The next step is to create a detailed plan that gives you a true picture of your current earnings and expenses. It helps you to calculate your savings easily. If you are a business person, or an individual, an Income Statement is equally important for you because it leads towards your profits or savings.

For example, if you are doing a job you may calculate your income from your job and other sources. The next step is to figure out your expenses. After netting off you may calculate your savings over the months and years. It empowers you to control expenses and increase your savings.

4. Cash Flow Management:

Cash flow management is another important component of financial planning. It involves calculating the real-time inflow and outflow of cash. This component is very important for businesses and Cash Flow Statements are prepared at the end of Financial Periods.

As an entrepreneur, you may develop a cash flow management strategy to ensure timely payments and to control your inventory levels.

5. Risk Analysis:

Risk analysis is another crucial element of Financial Planning. It is equally important for businesses and individuals. Before developing your final plan you need to assess the financial risks associated with your investment plans.

It comprises economic factors, business conditions, and other factors. For example, depositing funds into a savings account is less risky as compared to investing in a start-up business.

6. Investment Strategy:

In my opinion investment strategy is one of the most critical components of financial planning. Investment strategy comprises allocation of funds for meeting your key financial objectives. For example, in a business, you may develop long-term plans including through investment in shares, new ventures, etc.

Individuals may strategize their investment with rational decision making keeping in view available resources, risk factors and rate of return. A diversified investment strategy always wins. However, it is more suitable for large-scale businesses.

7. Profitability Analysis:

Another inevitable component is profitability analysis among available options. It enables you to evaluate the expected profits from your investment in available options.

Profitability analysis helps you to understand the future prospectus of the investment and you may choose one of the best options with higher profit margins.

I observed that investment in property 3X has a higher outcome as compared to depositing funds in a savings account.

Key Benefits of Financial Planning

• Clear directions: It brings clarity to your long-term and short-term goals to build a better strategy plan.
• Setting the goals: Efficient financial planning helps you to set realistic financial goals along with strategies to achieve those goals.
• Managing the risk: Another benefit is to identify the potential risks and their mitigations in available investment opportunities.
• Optimized utilization of resources: It enables you to utilize your resources with maximum outcome. 

Steps to Start Your Financial Planning Journey

Now you have got through the basics of the Financial Planning, here next comes the steps that are basically necessary for the starting the journey towards planning of finances.

Step 1: Analysis of Current Situation:

The first and foremost step is to analyze the current situation. It consists of reviewing your income, expenses, and savings. It provides a 360 view of your financial standing.

If you are a job holder, check your monthly income, and review your expenses and average savings. If you are earning $5000 and your expenses are $3500 then monthly saving would be $1500.

Step 2: Setting Up the Financial Goals:

The next step is setting up your short-term, medium-term and long-term goals. Develop a detailed plan for these goals with specified timelines.

For a person with a monthly savings of $1500, a suitable investment option is to deposit money every month in a savings account to get a return on small amounts. His long-term plan may include investing this money in shares, property or new ventures after 03 to 05 years.

Step 3: Draft a Budget:

To be specific to your financial planning and to achieve your goals, draw a monthly budget for your expenses and savings. It will help you to prioritize your savings.

If a person is saving $1500, he can increase his savings to $2000 after evaluating the extra expenses that occur every month. He may save $500 more if he avoids going outside with his friends on weekends.

Step 4: Evaluate your Investment Portfolio:

Once funds are invested, the next step is to keep evaluating your investment portfolio. It enables you to align your investment with your long-term financial goals. It allows you to divert your investment from one industry to another or you may choose a diversified investment portfolio.

A person can successfully earned $150000 in five years from depositing his savings into to savings account. Now after reviewing his goals, he decided to invest the amount in a new business venture with a growth rate of 150% annually. It will enable him to double his investment in less than one year.

Common Mistakes to Avoid in Financial Planning

Many people do not consult with any guide before proceeding toward the financial Journey. During the process their comes many challenges, which are very annoying. Below are some mistakes to avoid to help you from Financial Planning.

1. Lack of a Comprehensive Financial Plan:

One of the most common mistakes is to not draw a realistic and comprehensive financial plan covering all aspects. There are many chances that you stuck in the middle of your planning journey for not having a clear roadmap to go forward. Therefore, it is critical necessary to have a strong financial plan.

2. Irrational Decision-Making:

Many people often make irrational decisions when spending money. Money spending is connected to our emotions and leads to unnecessary spending. Therefor, you must think twice before making a purchase decision, and before making any decision, it is preferable to discuss it with our friends and family.

3. Ignoring the Unexpected Events:

In financial planning, you often ignore unexpected events such as job losses, health issues, and other economic factors. You may have a separate pool fund to overcome these unexpected scenarios. Having such kind of financial is not only helpful for the business owners but also for the employees.

4. Not Saving as Per Plan:

Once you have completed your financial plan, the next common mistake is following your savings plan consistently. This will affect your entire strategy in the long term, and you will not be able to achieve your financial goals.

5. Not Reviewing your Financial Planning:

Another common mistake is not to review your financial planning after a certain period intervals. It will weaken your financial planning because the world is changing so fast and you need to upgrade your strategies and goals to get your desired results.

Tips for Beginners in Financial Planning

There are a few tips for beginners to follow for successful Financial Planning.

1. Keep the End in Mind:

One of the most important tips for beginners is to keep the end in mind at the time of starting the financial planning. If you are not clear about your long-term objectives then your financial planning will be fruitless.

2. Know Spending Priorities:

The next tip is to learn about your spending priorities and your lifestyle. It will help you to point out and cut down your extra expenses and will help you to increase your savings.

3. Know Fixed Cost:

I always suggest, first to know your fixed costs and set your budgets according to them and start decreasing your variable costs. This financial business strategy encourages saving.

4. Invest Monthly Savings:

This is a very important and initial step of financial planning. Always prefer to deposit your small savings amounts into to Bank`s savings account. It will allow you to generate profits initially without any risk.

5. Rely on Available Resources:

Always rely on your available resources and start your financial planning even from small savings amounts. With time, you will find more ways and opportunities to revisit your financial strategies to achieve higher goals.

Bottom Line:

Financial planning enables you to manage the money and change your attitude towards spending. Efficient financial planning encourages savings and empowers you to invest to generate additional income.

It is a slow and steady process but it pays off in the long term. It empowers you to design a financially rich future for you and your family. Further, it is equally important for businesses as well as for individuals.