What is Financial Planning?


Financial Planning is a terminology which is most commonly used as synonyms of investment planning or management and widely misutilized in India. Every investor believes that he is doing his financial planning either on his own or through some life insurance agent, mutual fund distributor who looks like a financial advisor but actually he is a distributor of financial products. This article is an effort to explain what Financial Planning is ? And how it is beneficial to  investors?

By definition “Financial planning is a process of meeting your life goals through available resources in the best possible manner”.

Let us first understand this in details.

A Systematic Process: Financial planning is a six step process, this means that there is systematic series of action to organize and manage your financial affairs. This process is defined by Financial Planning Standards Board of India.

Your Life Goals: The entire focus of financial planning process is on meeting your Life Goals like Retirement Planning,  Higher Education Fund  planning for your children, etc. As against this, traditional approach of investment never focuses on life goals. It only focuses on financial products.

Available Resources in the Best Possible Manner: Financial planning focuses at optimization of your current resources and future resources to meet your life goals. Financial planning always aims at optimization and not maximization because maximization means maximum risk. Now you may not need to take that much risk and it may lead to losses in your investment. Let us take a simple example to understand this, suppose you are travelling from your office to home and distance is 10 kms and you have sufficient time say you have 1 hr to reach, now will you drive at higher speed in a crowded area? No. But say someone is suffering from heart attack and you have to reach hospital at the earliest now you will try to drive at higher speed. Similarly, you have to check how much risk you should take to meet your life goals, if you are meeting your life goals easily with available financial resources why should you take higher risk when you can avoid it. All these aspects are thoroughly taken care in financial planning.

How financial planning benefits you?

Now let us understand How Financial Planning benefits you.

1. Moving towards your Destinations: Financial Planning helps you to move towards your financial goals. Once the client decides to go for Financial Planning the first step is to decide on goals. Goals are like the station were you want to reach and you also decide time frame when you want to reach so now you can decide on mediums like whether you want to go by road or by train or by air.Goals are broadly divided into two categories :- basic goals like Home, Child Education fund Planning, Retirement Corpus Planning and other luxury goals like Farm house, Luxury trips etc.

 Whenever I meet new clients or prospects and I ask about their goals or when I ask them why you have made existing investments? The answer that I get is that they have made investments but they are not clear about their goals and objectives. It is like I am already travelling in a train but don’t know what is my destination, where I have to reach or why I selected this train?

2. Helps to control unwanted expenses: Budgeting is a very Important part of Financial Planning. Normally people avoid making budgets but according to me it is very important because once you make a budget you actually come to know where you actually spend your hard earned money and areas in which you can save some money or which are the areas where you should stop spending money. This helps you in increasing your current savings and in turn helps you to reach your goals early. Here, after making a budget you can compare it with actual expenses and analyze the gap and take corrective actions

3. Better Risk Management and Risk Adjusted Returns: Normally without financial planning investors focuses on returns and not risk. Whereas financial planning has inbuilt strategies for risk management which helps investors to achieve better risk adjusted returns and optimize their resources.

4. Stops from making mistakes: This is the most important area where financial planning and financial planner helps the client. When a client is taking his decisions on his own he cannot analyze or understand the implications of his decisions beyond a certain level and beyond a certain time frame whereas an experienced and qualified financial planner can easily understand the implications and that’s why he will always protect the client from making such mistakes. It is being said that Financial Planning is more of art than science.

 In Personal Finance it is important to know what to do but it is more important to know what not to do. An experienced and qualified Financial Planner helps you on this aspect.

5. Succession Planning: Indians are very careless about their succession planning. I hardly meet anyone who has prepared his will or even decided how he wants to distribute his wealth if he is not there. Succession planning is a very important part of financial planning and a qualified and experienced financial planner can prepare an effective succession plan for the client. This can help the client in two ways first it avoids family disputes regarding distribution of assets on death of a family member and other it assures smooth distribution of wealth as per wish of the client.

6. Saves at the Time of Unfortunate Events and Financial Crisis: Insurance Planning is an important part of entire Financial Planning Process. Events like early death of the bread winner, high medical expenses or disability , critical illness, damage to assets due to earthquake or fire or flood   etc. affects  the financial stability of the family and disturbs the financial goals. But if insurance plan is properly designed to take care of all these events these events will not affect financial goals of the family.

Financial plan and Insurance Plan work together in a parallel way if there is any disturbance in Financial Plan due to happening of any uncertain events insurance plan will come forward and maintains the stability of financial plan.

Another important aspect of Financial Planning is providing for contingency fund. Contingency fund is provided for medical uncertainties, uncertain job losses or any uncertainties in the business or profession of client. Normally here expenses of 6 to 12 months are kept in saving account so that this can be withdrawn easily whenever needed.  

7. Effective liability management: Normally, liability management is a grossly ignored area in investor’s financial affairs. Financial Planning helps the clients in liability management basically in two ways :

  1. When a client has to take a fresh loan, he doesn’t  know about how to calculate interest, what will be the tax implication of interest paid, how to compare two loan products of different banks, etc. as a result he accepts whatever banker tells him. But a experienced and qualified financial planner can help him on all these aspect very effectively and can save lots of money.
  2.  Sometimes I meet clients who already have taken more than one loans at high interest rates and all loans are at different interest rates. In this type of cases restructuring between all different loans and assets can save a lot of interest cost.

8. Portfolio and Plan Review:

Portfolio Review: Normally investors after making investments, never review their portfolios. Portfolio review is integral part of financial planning process so in financial planning approach client’s portfolios are reviewed at regular frequency like quarterly, half yearly or at least annually. Portfolio review involves review of asset allocation as well as financial products in which investments are made.

Annual Plan Review: Financial plan which is made once doesn’t hold good for life time. So it is important for inventors to review their financial plan every year. Annual review is also integral part of financial planning process. In annual review, financial planner reviews income, expenses, assets, liabilities of client and he also reviews performance of the portfolio. Here client understands whether he is moving in right direction and with right speed or not.


 To conclude with financial planning is a very broad solution that keeps your financial life on track and helps you to achieve your financial goals easily. Most importantly it is a broad concept as against investment management which focuses on management of your net worth and not only your investment. Apparently Financial Planning looks a very simple concept and you may not realize the benefits in first instance but it is a detailed process which keeps your financial life on track. In my next article I will write about the Process of financial planning and how it is different from traditional approach of investment.