What is Financial Planning? And what are the limitations one needs to keep in mind while the planning process?
Financial planning is the process of putting together a plan for your future, specifically about how you will manage your finances and prepare for all unwanted expenses that may arise. The process involves evaluating your current financial stamina, identifying your future set of goals and then preparing relevant plans for you to choose which plan suits you the best.
It is comprehensive and vast, and can combine a variety of services. It focuses on overall goals and responsibilities of the client/planner. It then addresses a number of financial expenses and assets to figure out how to best enable people to make the most of their fortunes. Financial planning is different from asset management.
The future goals could include paying for your children to go to college, giving to charity, paying for a comfortable retirement or maximizing the amount of money you pass down to your relatives and family members safety. The financial planner will help you create a financial plan after understanding your goals and needs.
There are four widely popular principles you should understand. They are simple and common concepts, but not always easy to implement.
- Long-term goal investing
- Smart spend and easy return
- Emergency savings and planning
- Avoiding future debts/loans.
Yes! It does require patience. After the well known quote “All good things to those who wait….!!!”
Financial plans do require more in depth focus to plan for specified objectives and goals and need to take into consideration the regulations, laws, taxes, other legal expenses based on specific situations. If your base is strong, your foundation of the core ideals will be easier to plan and make it work.
- Long-term goal investing
A longer perspective the better financial decisions you’ll make and choose. Investing for the long term and worrying less about the short term ups and downs. e.g Buying own house, child education
- Smart spend and easy return
First you need to prioritise what you earn and what you spend. You can prepare a budget list, monitor it and develop a section for emergency spending for unwanted expenses. If you spend smartly than your return level over a long period, you’ll more likely to achieve your set goals. E.g. marriage expenses, buying a car
- Emergency savings and planning
This plan is set keeping in mind the help that you may need to ride out life’s unwanted surprises. You will need to be spent smartly compared to your returns in order to build savings. And this savings will help you avoid debt as well.
- Avoiding future debts/loans.
Higher the debt ratio/level higher will be the risk involved. It may allow the planner to do more now, but it will detract from your capacity to save and invest in the future. Financial issues are usually augmented with debt.
Though financial planning is a vital part of living in security it does have limitations as well. Some of which are listed below:
- Costly Process
Planning is the initial process so it is extremely time and funds consuming. It is a major limitation of financial planning for small business owners. In depends on how you maintain your finances based on it consequences might vary in many matters of future planning.
- Lack of Knowledge and Accuracy
It is a major issue in financial planning as everyone is focus on how to avoid the cost and save time due to which people generally do not investigate or learn more about the future goals and how to achieve them.
- Communication Gap
If there is lack of communication and improper co-ordination anywhere between the financial planner and the person looking for financial planning advice, even the best and cost effective financial strategy will never be effective and is guaranteed to fail. This type of limitations of financial planning most observed in large companies.
- Impact of Government rules and policies
Sudden changes in the government guidelines or the economic environment may adversely affect your finance planning. Financial planning is a crucial process which cannot be adjusted based on the unexpected changing government rules, policies as well as financial environment, even an efficient financial plan will probably also be inefficient for the sudden required adjustments.
- Assumptions in Financial Forecasting
As financial models depend on assumptions, which, truth be told may cause occurrence of human errors. Therefore, the financial plan must be monitored from time to time. Generally, a major cause of human error may occur in calculating the government rules and fluctuating economic conditions.
- Failure to Plan or Having a Fixed Plan
Planning is always a forward-looking process. Hence, it should be an on-going process rather being fixed model. Therefore, such limitations of financial planning can be avoided by hiring a best financial planning team.
- Over pioneering projection
Usually professionals and business owners put through over determined projections then being realistic. Always analyse the best clear financials. Business planning should-be based on realistic vision and mission.
- Conclusion:
Planning and also forecasting of future efforts may be a difficult work for someone. There are times when, such planning is carried out hastily and without proper techniques of information gathering and analysing which can lead to failure of long-term goals.
To overcome such limitation of financial planning model, you should protect yourself with on-going effective models.
