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Types of Financial Planning

Your life has multiple aspects – your family, your work, your social life, your hobbies, and so on. Money touches all of these aspects. For this reason, financial planning is not a simple task. It has to be all-encompassing to be an effective plan. Moreover, you need to consider not just your present, but also your future.

Here is a seven-point checklist covering the broad areas in which financial planning can be undertaken:

• CASH FLOW PLANNING: 
  In simple terms, cash flow refers to the inflow and outflow of money. It is a record of your income and expenses. Though this sounds simple, very few people actually take time out to find out what comes in and what goes out of their hands each month. Cash flow planning refers to the process of identifying the major expenditures in the present and the future (both short-term and long-term), and making planned investments.
  This is to ensure you have the required amount whenever needed. Cash flow planning is the first thing that should be done prior to starting an investment exercise. Without this planning, you will not be in a position to know how your finances look like, and what you can invest in without stretching your liquidity. It will also enable you to understand if a particular investment matches with your cash flow requirement.
• RETIREMENT PLANNING: 
  This kind of planning means making sure you will have enough money to live on after retiring from work. Retirement should be the best period of your life, when you can literally sit back and relax. You are essentially reaping the benefits of years of hard work. This is easier said than done. To achieve a hassle-free retired life, you need to make prudent investment decisions during your working life, thus putting your hard-earned money to work for you in future. Planning for retirement is as important as planning your career and marriage. Life takes its own course and from the poorest to the wealthiest, no one gets spared. We get older every day, without realizing. However, we assume that old age is never going to touch us.
  The future depends to a great extent on the choices you make today. Right decisions with the help of proper financial planning taken at the right time will assure your peace during retirement. Retirement planning acquires added importance because of the fact that though longevity has increased, the number of working years haven't.

• INVESTMENT PLANNING: 
  Saving and investing are two separate activities. One has to do with your expenditure, while the other has to do with financial instruments. Your wealth will only grow over time if you have invested it in assets. Investment planning deals with the kind of instruments an individual should invest in to get the best out of his wealth.
  The first part of this planning has to do with your risk and return profile. This is where you set your limits in terms of the risk you are willing to take and the minimum return you expect. This is done based on your life stage, spending requirements with respect to your income and wealth, time horizon, liquidity requirements, and various individual specific constraints. Investment planning is important because it helps you to derive the maximum benefit from your investments.
• TAX PLANNING: 
   Tax evasion is illegal, but tax minimization is legal. Thus, you can reduce your tax liability by planning effectively. With proper tax planning you can increase your after tax income. This could also decide your investment decisions.
  For example, if you want to save tax, you may prefer to hold stocks for at least a year before selling. That way, you could avoid the short-term capital gains tax. This would change your trading strategy altogether. Similarly, you could prefer instruments that offer tax-benefits like Public Provident Funds (PPF) and so on.
• Children’s future planning:
  It is essential to plan for the future of your children. The purpose of planning for your child or children’s future is to create a corpus for foreseeable expenditures such as higher education and wedding.
  Thus, you will be able to provide an adequate security cover during their growing years. For ensuring adequate funding of your child's education, you as a parent need to not just save, but also invest systematically and at regular intervals.

• INSURANCE PLANNING: 
  You never know what surprise life will throw at you. Insurance planning helps you provide a safety net that can come handy in times of trouble. This type of planning is concerned with ensuring adequate coverage against insurable risks. Calculating the right level of risk cover requires considerable expertise.
  Proper insurance planning can help you look at the possibility of getting a wider coverage for the same amount or lower premium. Insurance enables you to live your lives to the fullest, without worrying about the financial impact of events that could hamper it. In other words, insurance protects you from contingencies.

• ESTATE PLANNING: 
  Everyone acquires a considerable amount of real estate during his lifetime. In case of death or during lifetime, this can be transferred to either heirs or to institutions and charities. Planning this transfer in the most efficient way is termed as estate planning.