Personal Financial Planning Definition:
Financial management of money by an individual or a family unit is known as Personal finance. The process involves earning, spending and saving the income by keeping an account of risks involved and future life events. According to the Oxford dictionary, the word ‘finance’ signifies ‘management of money’. Khan and Jain, define finance as the art and science of managing money. Webster’s Ninth New Collegiate Dictionary has two definitions of finance. The first one says, “Finance is the money resources, income, etc. of a nation, organization, or person.” The latter one is “Managing or science of managing money matters, credit, etc is called finance.
Personal finance not only involves the decision making process but also activities like budgeting, insurance, mortgage planning, savings and retirement planning. Basically all the activities fall under the impression of personal finance. Example of Personal Financial Planning – Let’s suppose Mr. X has a family of 4 members (a wife and two daughters) and he wants to invest in real estate in NCR. He will weigh pros and cons of this investment with reference to the future events like education of his daughters, their marriage and his retirement plans.
In late nineteenth century there was no term as personal finance, it was a part of home economics. However, recently economists argue that personal finance is indeed an integral part of macro economics.
The invisible hand is the driving force behind most of the market theories and practices. It is based on the concept that everyone in a market economy will behave in their own self-interest, rationally. According to the theory invisible hand makes market fluctuations predictable, also it provides assurance to the consumer that the change is favor of them.
However, the question on assumption began to rise in early twentieth century. Economists argued that consumers act irrationally in real life scenario. Further adding to their statement, they said most of the consumers lack the sufficient information and are unable to make the most rational financial decisions for their family. Often they are manipulated by circumstances; they are misinformed about the market condition, this leads them to conclude a decision which is not as rational as it seems.
The process of Personal Financial Planning corresponds to individuality. It focuses on identifying financial goals and objectives considering an individual’s personal, social, emotional and psychological factors. Further the planner aims to create such a personal financial plan that not only helps you to improve your current financial status but provides you with a long-term strategy for your financial future.
The personal financial planning process involves following steps –
Personal financial planning helps you build a robust foundation for your secure financial future. The very first step involved in personal financial planning is to be aware about your current financial position. For this you will have to evaluate your assets, mortgage payments, mutual fund investments, liabilities, tax returns, purchases of any bond or stock, record of securities transactions, insurance policies, wills, trusts, pension plans, etc. The valuation of your assets will give you an idea as to where you are capable enough to invest.
Once you’ve evaluated your net worth its time to decide where you want to be, financially. For this, you’ll have to be very specific about your personal and financial goals and objectives. If you’ve a family to support, consider all the possibilities with them in the future as well. Family financial planning like taking care of your aging parents, your children’s higher education and many more are to be taken under account. You don’t have to worry about it certified financial planners will always be there to guide you through your personal and financial values and attitudes.
The next step involves identifying and eliminating financial barriers. These problems will hamper your goals and objectives, for obvious reasons. Some of the financial barriers are inadequate cash flow, little or too much insurance, a big tax burden, or current investments that are losing the battle with inflation. These possible problem areas must be identified before solutions can be found. So basically the personal financial planning should be structured to minimize your financial barrier and optimize your financial objectives.
It’s time to execute the plan. Financial recommendations from your planner are only going to get you effective results if implemented properly. Although the planner will assist you during implementation, modification, or rejection the recommendations presented by him but the final call will have to be yours. You may also request your planner to co-ordinate with other knowledgeable professionals as required.
Mere implementation of the plan is not enough. You’ll have to have a regular background check on your personal financial plan. These periodic reviews are necessary to incur amendments in your plans with change in personal and economical conditions. The decision of accomplishing this task is on you, either you can use help of an expert or you can do it on your own. However, owing to their better knowledge of finance and policies financial planner’s assistance will be beneficial for you.
Personal Financial Planning Template:
You can download sample personal financial planning template in excel format from the below link. This financial planning template will assist you in developing your saving and growth plans. Check out the personal financial planning sample here.
- Tutorial Course - Financial Planning Basics For Beginners -
» e-Learning Chapter 1: What is Financial Planning? Definition, Benefits and Importance
» e-Learning Chapter 2: Different Types of Financial Planning Models and Strategies
» e-Learning Chapter 3: Determine Financial Goals – Assessment, Budgeting and Goal Setting
» e-Learning Chapter 4: Benefits of Top 5 – Key Steps Involved in Financial Planning Process
» e-Learning Chapter 5: What is Optimism Bias – Definition, Effects on Financial Decisions
» Currently Reading: What is Personal Financial Planning? Definition, Examples, Process and Template
» e-Learning Chapter 7: What is Business Financial Planning? Definition, Examples and Process
» e-Learning Chapter 8: What is Financial Planner? Definition, Scope and How to Become a Financial Planner
» e-Learning Chapter 9: Your Rights and Responsibilities as a Financial Planning Client
» e-Learning Chapter 10: Strategic Planning and Execution of Financial Plan
» e-Learning Chapter 11: Financial Backup Plan or Emergency Financial Assistance
» e-Learning Chapter 12: Top 10 Worst Financial Mistakes to Avoid or Common Errors in Financial Planning