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What is Financial Planning?
Table of Content
Financial planning is a road map to investment planning. It comprises details like current financial standing, short-term and long-term goals, budgeting strategies, and the resources available for investment and attaining financial stability. A financial plan drawn after considering the factors influencing the financial plan will help you stride towards financial stability.
For instance, the impact of lifestyle on financial planning is enormous. Personal choices influence spending habits and the available resources. Market conditions affecting financial planning determine the outcome of investments and portfolio adjustments. A thoughtfully drawn financial plan can be a great tool for wealth creation.
Why is Financial Planning Important?
Financial planning influences how you navigate the task of creating a corpus for future needs. It helps you understand your current financial situation, track your expenses and eliminate unnecessary ones, set financial goals, create emergency funds, and deploy short and long-term investment strategies to fulfil your short and long-term objectives.
Financial planning also helps you track income and expenses periodically and change your investment plan to match the changing income, goals, and market conditions. A thoughtfully drawn financial plan can be a great tool for wealth creation.
Factors Affecting Financial Planning
Sometimes, you may wonder why the outcome of your financial planning is not encouraging. Understanding the elements of financial planning is crucial as the results depend on various factors. The factors that affect financial planning are:
- Income
Income is one of the personal finance planning factors that affects your decisions. The resources available for saving and investing depend on your income. Most of us may not be able to progress towards wealth creation only with salary or business income. It is imperative to create a parallel source of income like freelancing, part-time jobs, or investing in assets providing regular income like dividends or interest.
- Expenses
The surplus available for investing depends on expenses, one of the crucial factors influencing financial decisions. Keeping track of expenses and spending within means can resolve a lot of monetary issues. Overspending will only lead you to a debt trap. This is one of the internal factors affecting financial planning that needs more focus for the plan to work for you. Budgeting is very important to improve resources to save and invest.
- Loan Borrowing
Borrowing for the inevitable, like medical emergencies, is not considered taboo. However, a debt used diligently helps spread your expenses. For instance, using a credit card judiciously and paying within the no-interest period is a prudent way of using debt.
This way you can track your expenses and eliminate unnecessary ones. But this can become one of the major factors affecting your financial planning if you go into a borrowing spree and have a mountain of debt which will affect your present as well as future.
- Spending Habits
High discretionary spending habits deplete savings and investment potential. This is a major hurdle for financial growth. Spending is one of the factors influencing financial planning. It directly impacts the economic factors in financial planning. Mindful spending helps wealth creation as it improves savings and enhances resources for investment fostering long-term financial stability.
- Lack of Emergency Funds
Lack of emergency funds to deal with situations like loss of income, medical emergencies, etc., can create a financial crisis, leading to financial obligations. Investing in life insurance and health insurance is imperative to make up for the emergency funds. Life insurance will provide financial security to your family, whereas health insurance will take care of medical expenses. The emergency fund should be adequate for 6 months of living expenses.
- Family and Dependents
The number of members, depending on your income, increases with every life stage. Increasing dependents can become one of the financial planning challenges when your income does not increase proportionately. Starting investments early in life when you have better resources ensures long-term financial stability.
- Expected Lifespan
Expected lifespan is one of the critical factors affecting financial planning. How long you live is the deciding factor for how much income you need for sustenance after retirement. A longer lifespan impacts your finances greatly as you will have to plan for a longer period.
- Taxation
Taxation is one of the external factors in financial planning. It reduces the disposable income and influences savings. This is one of the factors affecting financial plan that draw your attention to a tax-efficient savings plan. The deductions and exemptions in tax-efficient options affect wealth management, expense management, and retirement planning. It is imperative to understand tax laws to develop financial strategies that minimise tax liabilities and enable better financial growth.
Conclusion
Financial planning is an ongoing process and has to be monitored and adjusted periodically. To manage your finances skilfully, you need to consider the factors that affect financial planning before drawing a solid investment plan that steers you towards wealth accumulation. When it becomes a habit to track your expenses Vis a Vis your income and modify investment strategies, you will observe your finances falling into place and enabling you to make informed decisions.
FAQs on Factors Affecting Financial Planning
Q. What are the various factors affecting financial planning?
The various factors affecting financial plan are income, expenses, loans, lifespan, taxation, etc.
Q. How do family responsibilities influence the factors affecting financial planning?
Growing family responsibilities increase living, education, and medical expenses. They also affect insurance, saving, and long-term financial needs, mandating a proper budgeting
Q. How do tax policies affect the factors affecting financial planning?
The various deductions and exemptions allowed under the tax policies affect the returns on investment, retirement planning, income distribution, etc. Changes in the tax policies alter the investment strategies with more focus on tax-efficient plans.
Related Articles:
- Importance of Financial Planning
- Young and Empowered: Financial Planning for the Entrepreneurial Spirit
- Baby Steps to a Secure Future: Financial Planning and Wealth Management
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Francis Rodrigues
Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.
Written By:
Vishal Subharwal
Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.
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HDFC Life
Reviewed by Life Insurance Experts
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This material has been prepared for information purposes only, should not be relied on for financial advice. You should consult your own financial consultant for any financial advice.
1. Provided all due premiums have been paid and the policy is in force.
18. Save 46,800 on taxes if the insurance premium amount is Rs.1.5 lakh per annum and you are a Regular Individual, Fall under 30% income tax slab having taxable income less than Rs. 50 lakh and Opt for Old tax regime.
ARN - MC/12/24/18666
