The difference between financial management and financial planning could be difficult to ascertain. However, you should understand it as well as you can as both the activities add value to your financial life, but have different purposes. You will need financial management far more often than financial planning.
So, let’s explore the terms further and understand how they can be useful in your financial life.
What is Financial Management?
Financial management is the name of day-to-day financial decisions you make to ensure that you can meet your immediate goals for saving and expenses. In other words, you can say that financial management will help you meet your financial targets efficiently.
This may require an understanding of the best practices and extensive knowledge of financial instruments such as credit cards, loans, FDs, RDs, etc. However, the financial targets you want to achieve with financial management do not include your life goals.
Objectives of Financial Management
You would want to achieve the following objectives with financial management:
- Keep your expenses within the budget
- Meet your monthly and annual savings targets
- Ensure optimum use of available funds
- Ensure fast conversion of savings to investments
- Ensure availability of funds for necessary expenses
- Maintain low cost of funds, i.e., when borrowing
You can also include looking for the least costly alternatives for large expenses under financial management objectives.
What is Financial Planning?
Financial planning is a more comprehensive and holistic exercise in your financial life. Financial Planning and Standards Board (FPSB) defines financial planning as a process of developing strategies to help people manage their financial affairs and meet life goals.
Here the words – ‘strategy and life goals’ are very important, as a financial plan is usually a document for your life’s financial journey. Thus, a financial plan is a strategic document which aims to draw a roadmap toward all short, medium and long-term life goals.
Objectives of Financial Planning
Financial planning objectives are long-term and may continue to apply for life. The following five financial planning objectives are the most common:
- Understand sources and applications of funds
- Understand life’s important financial goals
- Prepare for contingencies
- Build a roadmap to meet life’s long-term goals in a tax-efficient manner
- Prioritise fund allocation to needs, goals and aspirations in that order
Financial planning objectives will also define the roadmap.
Difference Between Financial Management and Financial Planning
Financial management and financial planning are two different skills. While both add value to your financial life, you may need expert assistance in at least one. Here’s why:
|Financial Management||Financial Planning|
|Exploits tactical advantages (deals, discounts, etc.)||Gives a long-term vision for personal finance|
|Short-term, transactional decisions||A long-term, comprehensive strategy|
|Deals with day-to-day transactions||Deals with the overall financial roadmap for life|
|Requires negotiation skills||Requires skills in financial mathematics|
|Necessary for turning savings into investments quickly||Necessary to build an adequate corpus for long-term goals|
|Focuses on immediate financial needs||Focuses on financial stability in the long run|
Financial management is often a skill acquired by sheer experience. How well you can use your credit cards to spend money without sinking into debt is one example of good financial management. Whereas, staying prepared for emergencies like hospitalisation and saving adequate money for retirement is the achievement of a good financial plan.
Instruments of Financial Management
Financial management is a necessity even if you find this hobby difficult to pursue. You should use the following instruments to organise and improve your financial management:
1. Regular Budgeting
Budgeting is the exercise you need to conduct at least once a month. But the best results will arrive when you have an annual budget as well. The idea is to maintain your annual targets. Even if you happen to exceed your quota for a month, you can recover and maintain your annual budget limits.
One step that a lot of investors often miss during budgeting is that you need to also keep a note of your expenditures. Use a spreadsheet or a mobile app to immediately take note of your outflows in the day. This will help you tally your spending habits with your budget limits.
2. Bank Accounts
You should know your bank account very well. Most of the transactions in your financial journey will start and end with your bank account. So, it is very important to know what you can and cannot do with it. For example, most banks with internet banking allow the following investment options:
- Bank FDs
- Corporate FDs
- Public Provident Fund (PPF) investments
- Credit Card payments
- Recurring Deposits
Knowing what you can do and how much it will cost with your bank gives you an edge in your transactions including investments.
3. Debit/Credit Cards
Debit and credit cards are common instruments for daily transactions. Using them carefully can allow you multiple benefits. Though unrestricted and indiscriminate usage may also lead to financial hardships.
Thus, anytime you take a debit or credit card, try to understand your benefits from them well. Most debit and credit cards offer points for the money spent.
4. Line of Credit
If you have surplus money in your bank, you can use a line of credit using your FDs. A line of credit allows you to use the money in fixed deposits even before maturity. The interest rate on the line of credit (lien on FD or Overdraft) is usually lower than other credit instruments.
Instruments of Financial Planning
Almost all investment options including the instruments of financial management can become a tool in your financial planning. However, financial planning deals with majorly investment and insurance avenues.
Both insurance and investments in financial planning will provide solutions for long-term financial needs.
Here are a few prominent instruments of financial planning:
1. Term Life Insurance
Term life insurance is a necessary investment, especially when you have dependent family members. A term life cover of 10-15 times your annual income is sufficient for your family to look after the following after your untimely demise:
a. Their regular living expenses
b. The cost of important goals
c. Repayment of any ongoing debt
c. Repayment of any ongoing debt
The importance of Mediclaim and critical illness insurance is not hidden. Family Mediclaim insurance will come in handy in emergency health situations. However, critical health insurance will offer a lump sum benefit in the case of a diagnosis of illnesses such as heart failure, cancer, etc.
3. Unit Linked Insurance Plans (ULIPs)
ULIPs are long-term diversified investments which allow tax benefits. Other important ULIP features are listed below:
a. Partial withdrawals after five years
b. Invest in a mix of diversified funds of equity and debt
c. Bonuses for long-term investors
d. Invest up to the age of 99 years with plans like Invest 4G ULIP from Canara HSBC Life Insurance
e. Use automated strategies to manage equity investments
4. National Pension Scheme (NPS)
NPS is directed towards building a retirement corpus. Investing in NPS allows you to benefit from the following features:
a. Invest in a diversified portfolio of equity, debt, and alternative assets
b. Use automated strategies to manage portfolio risk
c. Emergency withdrawals allowed for child education, 1st home purchase, medical emergency
d. You can withdraw up to 60% corpus at the age of 60 tax-free
5. Mutual Funds
Mutual funds are simple and versatile investments which offer great flexibility and liquidity in investment. Here are the benefits of investing in Mutual Funds
a. Select from a range of mutual funds to invest in as per your choice of asset and risk profile
b. Tax saving with equity mutual funds – ELSS
c. Flexibility in investment and withdrawals
d. Choice of systematic withdrawals and investment
If financial planning is your map across the financial life, financial management is your skilful driving. The combination offers you the best results when it comes to money. While planning offers a long-term vision, the management deals with the daily decisions.Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.