Wikipedia of Finance - e-learning course on Financial Planning Wikipedia Chapter - What is Financial Planning? Definition, Benefits and Importance

What is Financial Planning? Definition for a Business, Individual with Examples

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Financial Planning Definition:

Financial planning defines as the process of evaluating an individual’s current financial status and coming up with an effective strategy to meet the life goals. These life goals vary from an individual to another. In order to accomplish these goals, it is important for an individual to follow a series of specific steps or algorithms to organize the finances by curtailing his expenditure and optimizing savings in the future. The basic idea is to coherently allocate the revenue to different types of expenses like rent, school or college fee for children, bills and other utilities. Also some part of income is to be reserved for short-term and long-term savings. A financial plan should not be confused with an investment plan, except for some rare cases. Personal finance plan generally focuses on specific areas such as risk management, real estates, college, or retirement planning.

What is Financial Planning?

Financial planning means, it is a consistent cycle of recognizing financial objectives, organizing those goals and planning for how to accomplish them. In spite of the fact that distinctions in age, way of life and financial assets may make a financial plan change after some time, the financial planning process remains fundamentally the same. Analysis and appropriate decisions are vital parts of the financial planning for individual. A financial plan that is straightforward and easy to execute. Also it is much easy to track the progress of your financial planning to meet your long –term financial objectives. A right step today toward tomorrow is important to guarantee that your financial plan keeps on meeting both current and future goals.

What is Financial Planning for a Business?

Financial planning for a business is necessary for deciding how a business will stand to accomplish its key objectives and future goals. More often than not, an organization makes a Financial Plan immediately after the goals and vision have been set. The Financial Plan at every level of exercises, hardware, assets, project schedule and materials are tracked to keep check on the accomplishment of expected goals. Financial planning for a business activity involves:

  • Evaluate the business condition.
  • Determining business goals and vision.
  • Identifying the types, quantity of resources required.
  • Outline the expenses to make a financial budget.
  • Identifying any issues or risks involved in it.

Role of financial planning in a business incorporates 3 types of classifications, they are:

  • Strategic role of financial management.
  • The Financial planning cycle.

When drafting a financial plan, the organization should include the timeframe of the plan, regardless of whether it be on a short-term plan, medium-term plan or long-term plan for around 5, 10, 20 years or more. Likewise, the investment proposal and individual tasks of each operational unit inside the organization should be combined as one large project. This procedure is called aggregation.

Financial Planning Examples:

Let’s take financial planning example to understand it. Assume that Rakesh and Priya, a wedded couple whose kids are developed and financially free, are planning on retirement in a couple of years. Rakesh has worked for government, so he will get pension amount after retirement. While Priya won’t have any pension benefits but she has saved in past few years and will save more till she get retired. Rakesh and Priya trust that they are very much arranged for retirement, yet they might want to see exactly how all around arranged they are, and they have additionally organized retirement planning to affirm that they would both be fine in either of the deceased partner.

Financial Planning Example Analysis Report:

As they suspected, Rakesh and Priya have enough cash reserve and pension for their retirement. In the wake of looking into their financial plan results, Rakesh and Priya get monthly income from their investment which is equal to monthly expenses. Which is good for now but Rakesh and Priya will need additional cash reserve to beat inflation along with the monthly expenses. As monthly expenses keep on increasing with the increase in inflation but monthly income from investment will not increase which can badly hurt their retirement planning. Also if Rakesh pension amount is not inherited by his spouse after decease than Priya will not be able to sustain long financially with her saving funds.

Financial Planning Example Analysis Overcome:

In this financial planning example – Rakesh and Priya need additional amount to overcome inflation plus Priya need additional cover in-case Rakesh pension is not inherited. In such case, they need to take best life insurance plan which will keep on giving monthly income after retirement. Also Rakesh need a best term insurance plan to insure him to secure Priya’s financial need in-case of his death.

Conclusion:

After reading financial planning definition and financial planning examples, you should start drafting your financial plan today. Ensure you put the time-frame for your financial plans. This financial planning means you should track and check that plan is working as you have designed.

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