Explaining the Main Objectives of Financial Planning

Updated on July 25, 2024

Article Outline

Financial planning means planning for your economic future and planning it well. It is basic human nature that we all want to ensure that the financial resources that we expend are being used to the maximum benefit, and it is for this reason that financial planning comes into play. In its simplest definition, personal financial planning includes the financial decisions made with the aim of reaching an individual’s life objectives. It could be in terms of retirement, in projects such as purchasing a home, or even in meeting daily expenses. These are areas where having a good financial plan can go a long way.

 

In fact, a good financial plan can be described as similar to a map through the rough financial terrain and the uncertainties that it brings. If we have definite aims and if we have laid down the proper strategies for their achievement, we are in a better position to take a proper plan, and there will be no unwanted financial stress. Let’s dive into the key objectives of financial planning and find out how it can bring us financial security and, therefore, calmness.

Setting Clear Financial Goals for the Future

Securing our future is one of the highlighted objectives of financial planning. Among the most important financial planning strategies, goal setting is considered to be one of the most crucial stages. Of course, we cannot make a plan to get to a certain goal or destination if we are not even aware of that goal or destination.

 

When it comes to setting financial goals, priorities should be mentioned as the key. Who and what do we value most? When this is defined, it is possible to expand them to SMART (specific, measurable, achievable, relevant and time-bound) goals.

 

For instance, if we have an aim to save for a down payment for a house, then a bigger target, like saving up to $20,000 within the next three years, should be the goal. For this purpose, we divide this goal into chunks to save a certain amount every month to be more achievable and assess the progress in the process. Besides, defining the goals properly not only offers us direction but also provides the direction to always be on the track.

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Ensuring Availability and Optimal Use of Funds

Ensuring we have sufficient funds when needed is also one of the crucial objectives of financial planning. This involves both generating enough income and making sure it is used efficiently.

Ensuring Sufficient Funds

To ensure we always have enough money on hand, we need to:

 

  • Keep track of monthly bills and essential expenses.
  • Set aside money for annual or unexpected expenses, like car repairs or medical bills.
  • Save consistently for long-term goals like retirement or a child’s education.

Optimal Use of Available Funds

Efficient use of our funds means making smart choices about how and where we spend our money. Here are some strategies:

 

  • Prioritise Spending
  • Reduce Waste
  • Invest Your Funds Wisely

 

Table: Monthly Budget Example

 

Category Amount ($)
Income 5,000
Housing 1,200
Utilities 200
Groceries 400
Transportation 300
Savings 1,000
Entertainment 200
Miscellaneous 200
Total Expenses 3,500
Surplus/Deficit 1,500

Creating a Comprehensive Financial Roadmap

Once we have laid down our aim, the next step should be the development of a financial strategy. It involves everything, including budget management, debt management, and investment.

 

A financial roadmap acts as a guide, helping us make informed decisions about our money. It helps to avoid wasting our resources while keeping track of the results we want to achieve. Here’s a simple outline of what a financial roadmap might include:

 

  • Creating a monthly budget to manage our income and expenses.
  • Setting aside a portion of our income for future needs.
  • Choosing the right investment options to grow our wealth.
  • Develop a plan to pay off debts and avoid unnecessary borrowing.

It is easy to plan strategically when there is a roadmap of how various financial actions affect the plan. It also makes it easier for one to be disciplined and avoid making random purchases that can defeat a given plan.

 

Also Read: Functions of Financial Management

Effective Management of Income and Expenses

Controlling our income as well as our expenditure is among the fundamental objectives of financial planning. When we do not have ways of tracking and analysing where our money is going, it is so easy to overspend.  Here’s a simple example of how we might set up a budget:

 

Category Monthly Income/Expense
Income $4,000
Housing $1,200
Utilities $200
Groceries $400
Transportation $300
Savings $500
Entertainment $200
Miscellaneous $200
Total Expenses $3,000
Surplus/Deficit $1,000

Avoiding Unnecessary Fund Generation

Generating funds is crucial, but raising more money than needed can cause problems. Unnecessary funds can sit idle and don’t generate returns. Plus, they often come with costs, like interest on loans or opportunity costs. We can consider these steps to make enough funds to cover our needs without raising excess amounts:

 

  • Estimate how much you need accurately. This involves careful planning and forecasting.
  • Regularly review your financial needs. Adjust your fund-generation strategy based on these reviews.
  • Use the funds efficiently. Avoid raising extra money just because you can.

Strategic Investment and Tax Planning

The two foremost objectives of financial planning are tax and investment management. At the end of the fiscal year, it guarantees a higher return on investment and tax savings. Let’s examine effective ways to handle them:

Making Smart Investment Choices

Diversification Diversify investments since the studies suggest that it is unwise to put all or most of one’s investments on any one asset class, for instance, stocks, bonds or real estate.
Risk Assessment Access your risk-reward ratio. Are you willing to take high risk for a high return, or do you prefer low risk for a low but safe return??
Time Horizon Make sure that the investments you are making are relevant to the objectives you have defined. This means that a short-term investment plan will require less risky investment, but a long-term investment plan may involve risky investment.

Tax Planning Strategies

Tax-Efficient Investments Invest in assets (index funds, municipal bonds, etc.) that will let you claim a productive tax credit.
Deductions and Credits Make sure you utilise all possible tax benefits and deductions. For example, we may deduct the interest paid on our house, school loans, and retirement plan contributions.

Conclusion

The objectives of financial planning are not solely aimed at growing one’s wealth. It is about putting us in the best position possible to use our money for a better future. By clearly defining our aim, setting a long-term plan, controlling income and expenditure, and making proper investments, we can make our financial bases strong. It is necessary to keep revising and making necessary changes to our plans and not going just blindly. So, in this way, we can make a financial roadmap to secure not only our future but also our life goals.

FAQs
Setting specific financial goals, making a plan, controlling income and spending, making wise investments, and managing risk are the primary objectives of financial planning.
Concisely, budgeting involves managing one’s income and expenditure. It focuses on where one can trim down the spending and determines whether or not one is making progress as per the financially-planned objectives.
Revise the financial plan at least once per year or earlier if the circumstances change in your financial status, like medical emergencies, job loss, having a baby, etc.
Financial planning deals with defining strategic financial objectives and identification of strategies on how to achieve them, while financial management entails responsibilities of directing and controlling the flow of funds.

Updated on July 25, 2024

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