Financial Planning & Analysis

– CA Mudit Sharma

Financial planning is a step-by-step approach to meet one’s life goals. A financial plan acts as a guide as you go through life’s journey. Essentially, it helps you be in control of your income, expenses and investments such that you can manage your money and achieve your goals.

Many may wonder – “Do I really need a financial plan?” Some feel that saving regularly in bank recurring deposits or Systematic Investment Plans (SIPs) of mutual funds does the job of allocating their savings to investments. However, ad hoc investments lead to inefficient utilisation of your financial resources.

In order to become rich, besides earning salary or business income, you need to make money work for you. This is where prudent financial planning and investing comes to your rescue. A financial plan enables you to construct a road map to achieve all the financial goals and helps to build your contingency fund for any unforeseen needs that may arise. I have been doing financial planning for corporates but it is important for everyone in today’s world whether be it individuals, small or medium level enterprises and huge corporates. I will try and explain below the need for financial planning.

Managing Cash Flows or Budgeting

If you don’t realise where and how your income is spent every month, then you definitely need to plan your finances better. Many people fail to understand how their monthly salaries get extinguished, leaving them with very little or absolutely nothing to save. Impulsive buying and lack of budgeting for expenses leads to many problems in the long run. Thus maintaining a budget is crucial to stay on track towards your long term financial goals.

Efficiently Managing Debt

Taking a loan does offer instant gratification. However, when the liabilities turn in to a debt trap, it’s time you put your personal finances in order with a financial plan. Many often land up increasing our loans and borrowings through credit cards, overdraft facilities or personal loans. In most cases, these easy finance options result in damaging their financial health, leading them into a financial mess. A financial plan will not only help you to come out of this mess, but will also enable you to manage your cash flows better in order to achieve your other financial goals.

Streamlining Your Investments

If your investments are scattered and you are yourself unsure about where you have invested, then it’s high time for you to put your portfolio in order. In most of the cases, tips from friends and families go about forming a portfolio, which may eventually leave an unsuitable portfolio for you. Also investing in an ad-hoc manner results in scattered investments which get difficult to manage / track. The investment portfolios of such investors are extremely strewn with duplicating schemes and investments that do not provide any advantage of diversification. Such investment portfolios need to be consolidated and re-aligned so as to meet your financial needs.

Investing in The Right Financial Products

Many people invest in the equity asset class through shares or mutual funds. However more often than not, such investments are done on recommendations from friends and relatives and without taking into consideration one’s financial goals and risk appetite. In most of the cases these unplanned and non-researched investments result in loss of the investors’ money. Hence, it is extremely important that you invest only after considerable research has been undertaken on any investment proposition. Constructing a financial plan will enable you or your financial planner to review your portfolio (both equity and debt) and strike the right asset allocation to provide you with the best possible outcomes.

Setting the Right Asset Allocation

Most people consider equity as the best investment option especially during a stock market rally. However, it is never wise to put all eggs in the same basket. It is vital for you to understand that not all assets move in the same direction at the same time. If equities are witnessing a bear market, it is unlikely that other asset classes such as gold, debt instruments and real estate will also be witnessing a down-turn at the same time or vice-versa. Hence, it is best to invest in more than one type of instrument to improve your chances of achieving your long-term goals with minimal turbulence. Hence, a suitable asset allocation for you can be devised through a financial plan that acts as a shield to protect your wealth during uncertain economic conditions and market volatility.

Inculcating A Regular Savings Habit

To create wealth in the long -term, investing with discipline and determination is the key. Hence, you need to invest regularly and wisely to meet your financial goals. Investing small amounts regularly will also prove to be light on your wallet and reduce the burden of defraying a huge amount from your bank account. With a financial plan in place, you can determine the amount that you would need to invest regularly to meet all your goals. You can establish the requisite corpus for meeting your financial goals through planned investments in the right investment avenues.

Now that you have understood why financial planning is much needed, let’s look at how you can create a simple financial plan with just few small steps.

Step 1: Fix your relationship with money

Sometimes we forget and ignore the small expenses like travel expenses, mobile bills, junk food habit, etc. which can cost you a fortune. On a daily basis, they look small but eventually can have a bearing on your long-term financial health.

You need to write down your expenses to understand where your hard-earned money is being spent. You will then understand whether you are spending frivolously or on items that are essential to your daily activities.

Hence, it is always the small little things that matter in the larger picture called life.

Step 2: Set clear definitions of your goals and execute a financial plan

Perhaps you’d agree that goal setting is the most important part for planning, it definitely plays a major role in financial planning as well. It is very important to define and classify your long-term and short-term financial goals in life.

By setting financial goals, you will be able to channelise your income into productive avenues. This will help prevent ad hoc purchases while remaining focussed on financial goals that are close to your heart.

To quote Warren Buffet, “Do not save what is left after spending; instead spend what is left after saving.”

So, you need to make a budget and forecast your expenses both for a short and a long term and then compare variances. Because only a budget will help you in cost control and make you more accountable.

Step 3: Save systematically to build your wealth over long term

To attain financial freedom, above all, you have to be patient. Wealth building is a gradual process.

Your goals would seem distant at once and you must realise that wealth takes years to build, and everybody starts small.

However, one must be regular and systemic with his investments. Investing regularly also helps in dealing with market volatility. To absorb the shocks of the volatile equity markets well, SIPs work better as opposed to one-time investing. This is because you typically buy more mutual fund units when prices are low, and buy fewer mutual units when prices are high. This enables you to lower the average cost of your investments.

A Blueprint to your Long Term Goals

If you don’t have road map of how to achieve your dreams, a prudently drawn financial plan can be your blue print to meet your financial goals while empowering you to deal with contingencies as well.

Formulate an investment plan and stick to it. One day you’ll be patting yourself on the back for being aware enough to devise a strategy to secure your financial future.

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About the author: Mr. Mudit Sharma is a Chartered Accountant and a MBA from XLRI Jamshedpur with a vast experience in financial planning and analysis across some of the world’s leading MNCs (all part of Fortune 500 companies).

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