What are The Objectives and Importance of Financial Planning?

Financial planning can be defined as a systematic way of managing your money. This process starts by assessing the current condition of your finances such as your income, assets, liabilities, expenses etc. The next step involves establishing short, medium and long-term financial goals, then developing a robust strategy as well as suitable investment portfolio to achieve the identified goals.

So, budgeting, saving, investing, and managing risk all have a place in an appropriate structured financial plan. So financial planning is not just about saving a portion of your earnings for the future but also about creating a viable strategy for wealth creation. Also, while the objectives of financial planning are numerous, the central goal of these strategies is to ensure financial security and promote disciplined spending, saving and investing.

Now that you have a clearer idea of what financial planning is, let’s explore some of the key objectives of financial planning:

• Management of Expenses: One of the key objectives of personal financial planning is to management your expenses and ensuring that you live within your means. Through proper management of expenses you would be ideally placed to minimise debt and optimise savings to help your stay on course to achieve various financial goals.
• Achieving Financial Goals: Your financial goals may change with time as your responsibilities are liable to increase with changes in life stages. With proper financial planning, you will retain the flexibility to accommodate these changes and adapt your existing financial plans to achieve your existing as well as new financial goals.
• Superior Risk Management: Good financial planning will help you achieve an optimum balance between risk and return. This objective of financial planning is designed to help you minimise overall risk in your investment portfolio and optimise returns so that you are ideally placed to reach various financial goals irrespective of the investment horizon.
• Maintaining Adequate Liquidity: Liquidity is also an important aspect of financial planning. Liquidity is the ability of an investment or asset to be converted to cash easily without impacting their market value. High liquidity ensures that you can easily access cash so that you do not have to take on debt or prematurely redeem long-term investments during financial emergencies.
• Tax Optimisation: If you have gains from your investments, you have to pay taxes such as short-term and long-term capital gains. An effective financial plan would involve choosing investments that not only optimise risk and returns but also ensure that the impact of taxes on gains from the investments is minimised. This can effectively boost net returns for the investor and help achieve financial goals with greater ease.

Proper financial planning is designed to help optimise the available income for various purposes - saving, investing for growth, and maintaining a suitable lifestyle. Also, by understanding the objectives of financial planning, you can keep your financial life in balance and create a strong foundation for long-term wealth creation. Here are some top reasons why an individual should have a financial plan:

• Achieving Financial Goals: Long-term and short-term goals cannot be achieved by using the same investment and/or savings strategies. An effective financial plan can help you incorporate multiple strategies and investment options that can help you achieve a variety of financial goals with ease.
• Ensuring Financial Security: Protection against unforeseen circumstances through adequate insurance and creation of an adequately large emergency fund. Financial planning is not only about managing expenses and investments, but also to ensure adequate protection against eventualities such as death, disability, critical illness and various other financial emergencies.
• Optimizing tax benefits: A well-rounded financial plan would involve identification of various tax-savings investment options and ensuring the creation of a tax-optimised portfolio. This can help boost the net returns offered by the investment portfolio so that you are better placed to reach your financial goals.
• Peace of mind: Having well-structured financial plan in place ensures that you are well-prepared for the various uncertainties of life. At the same time, such a plan would help you stay on course to reach various financial goals. This combination can help minimise financial stress and help ensure peace of mind.

An important objective of a financial plan is the achievement of financial goals. A financial goal can be defines as a precisely defined financial goal or milestone that you plan to achieve. It comprises saving, investing, and spending in proportions that match your short-term, mid-term, and long-term financial goals. Financial goals with different investment horizons require varying levels of commitment. Based on the investment period, there are three different types of financial goals:

• Short-Term Goals This refers to goals that you wish to achieve in the next few months usually less than 1 year. Generally, these are required to meet your immediate expenses, which are smaller in scope and easier to predict. Examples could include saving for a short week-end trip or purchasing a new phone.
• Medium-Term Goals Mid-term goals are those that can take between three to five years to achieve and choosing the right investment is essential when planning for such goals. These goals can involve substantial financial resources such as purchase of a new car or saving for the down-payment of a new house. Also, these goals bridge the gap between short-term financial security and long-term wealth creation.
• Long-Term Goal Long-term goals take more than five years and frequently involve securing your long-term financial independence and prosperity. Retirement, buying a house, and a child's higher education are typically considered long-term goals. These require a significant degree of financial planning and it is essential to choose appropriate investment option in order to achieve the goal.

Without the right steps to create a financial goal, the outcome of a financial plan might not have the desired results. Hence, for successful financial planning, the following steps must be taken into account:

Having an idea of the financial planning challenges you might have to face is as important as understanding the objectives of personal financial planning as well as its various benefits. Here are some of the common challenges that individuals might face when implementing a financial plan:

• Limited Knowledge: Inadequate knowledge about investment and saving plans is the biggest hurdle for financial planning. While with sufficient time and effort, you might be able to develop enough understanding to create a financial plan by yourself, in the short time it might be prudent to seek the advise of a professional fund manager.
• Unexpected expenses: Unexpected expenses such as sudden illness leading to a large hospital bill, emergency repairs to your home, etc. can disrupt even the most lucrative investment plans, if you are not adequately prepared. Maintaining a sufficiently large and easily accessible emergency is necessary to help overcome this challenge.
• Large Outstanding Debts: Debt management is an essential objective of financial planning. However, outstanding debts come at cost in the form of interest payments. This can make it very difficult to save and invest. Hence, with the right financial planning, you would be ideally placed to minimise and pay-off high-interest debts like personal loans and outstanding credit card dues.
• Lack of Discipline: Not being disciplined in managing your finances can fail you in financial planning no matter how solid a plan you make. To solve this issue, it is advisable that you avoid making unplanned expenditures and stick to your budget. This way even small savings would have the opportunity to add up over time and create a substantial corpus through the benefit of compounding .

Understanding the objectives of financial planning for individual is a key requirement to help you achieve future financial security. By managing your budget, saving for emergencies, and investing your money wisely, you can build a strong financial foundation. Since financial planning provides clarity, security, and peace of mind, its importance cannot be overstressed.