It is imperative to engage in financial planning, particularly during difficult times like these. Financial planning is the process used to create a financial plan following a thorough assessment of a person's present income and prospective financial situation in order to protect that person's future earnings, assets, and financial withdrawal plans.
The typical error we frequently make when creating a financial plan for ourselves is to copy a strategy that has worked for one or a small number of people. A special exercise is financial planning. Every person has a customized financial plan that is created after considering their individual financial needs and aspirations. This suggests that each financial strategy is solely appropriate for the individual for whom it is designed.
A financial strategy should also be straightforward so that fewer financial items are needed to accomplish the desired goal. The objectives one set for themselves in a financial plan should be reasonable and doable. It should also be developed with the idea of diversification in mind and include a good variety of financial products.
The process of financial planning is not free from the influence of several elements. Your financial plan's influencing factors can be broadly divided into two categories. The first group includes elements that fall under our control and is referred to as personal factors. The second group of elements are those that are outside of our control and are referred to as external influences.
Personal factors are the factors that are closely related to an individual and hence differ from one person to another. These factors include the following:
1. Age:
Age is a key factor in determining which investment products are best for a given person. Let's use actual events to understand this lesson. You have plenty of time on your side while you're young. Therefore, young people are more likely to choose risky investment items. Always bear in mind that riskier investment goods produce results in the long run, therefore you are better off taking risks when you are young. In this scenario, even if something goes wrong and you lose some of your invested capital, you may gradually rebuild it. On the other hand, it is usually preferable for older people to place their money in fixed-income investment products. These items are less hazardous yet offer minimal returns. This is also true since older people are not able to regain their fortune if they suffer a loss.
2. Risk Appetite:
Each person has a unique capacity for taking risks. People who are 'risk-averse' are those who do not feel at ease taking chances. They are unwilling to take a chance, despite the fact that their investment strategy calls for it. People who take chances, on the other hand, feel at ease doing so. They put their money into riskier but more lucrative investment items.
3. Income:
Everyone can benefit from financial planning, regardless of their economic level. Regardless of your income level, your financial strategy needs to include both investments and savings. It should include strategies for your retirement, your children's schooling, unexpected expenses, significant purchases, and any other financial objectives you may have in life. Entrepreneurs and members in the salaried class have different levels and regularities of income. A salaried class person is constantly in danger of losing his or her work while a businessman experiences ups and downs in his or her revenue flow. Therefore, before creating a financial plan for an individual, all these elements are also taken into account.
4. Influence of knowledge:
An individual must have a thorough understanding of their finances if they plan to work for them. Financial planning helps you have more control over how much money you invest and improves your grasp of numerous financial concepts. A sound financial plan also enables you to determine whether you are saving a significant portion of your salary or more than you are making in savings.
5. Number of Dependents:
Your financial planning is heavily influenced by how many members of your family are dependent on you. For instance, it may be difficult for you to take chances if you are your family's sole source of income. On the other side, if you have additional money, you will be in a better position to take the risk and adjust your financial strategy.
1. Country’s economic growth:
An economic cycle occurs in every nation. The economy of the nation occasionally experiences periods of strong growth and other times it goes through periods of economic decline. Our financial planning is impacted by this economic moment. As an illustration, all of the firms in the nation expand when the economy is strong. Stock prices increase simultaneously. On the other side, the nation's economy is in a downward cycle if interest rates and inflation stay mild. When a country's growth is slowing down, it is not a good time to invest in stocks because the prices of equities in certain situations begin to plummet.
2. Interest Rates:
Interest rates play a critical role in deciding how much money firms can borrow from and lend to the banking industry. Market interest rates typically increase when companies desire to borrow more money to expand their operations. The impact of inflation on interest rates is also present. When national inflation rises, the RBI raises interest rates. Thus, the interest rate has a significant impact on an individual's financial planning.
3. Inflation:
Inflation is the term for the increase in price. Businesses are likely to see fewer profits if inflation and interest rates are on the rise. Therefore, in such a situation, stock prices will decrease. Our long-term objectives are also impacted by inflation. A high rate of inflation will likewise increase the price of our objective in the far future, necessitating a comparable level of investment now. There is a goal in the distant future that demands a comparable sum of investment.
4. Global Issues:
The state of our nation's economy is impacted by both domestic and international challenges. For instance, if the cost of petrol is increasing in the international market, it would also increase in India. Once more, depending on the situation globally, this drives inflation upward or downward. Additionally, there are financial connections between India and other nations. As a result, our economy is likely to be affected by any favorable or unfavorable developments in the global market. Therefore, a change in the international stock market will also affect the domestic stock market's movement.
Last Words
Depending on the different factors influencing their movement, the markets are usually erratic and can move either upwards or downwards. Therefore, developing a consistent portfolio that produces a sufficient quantity of returns has always required financial preparation. Before creating a financial plan for a person and determining which financial products to invest in, it is crucial to take into account that person's financial goals and aspirations.