What is the Main Purpose of Financial Planning and Control?

2024-08-02

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Managing funds in the present times has become the most challenging task. Since the markets are unpredictable, people nowadays require effective strategies to manage their funds and help build a road map for their economic well being. This is why financial planning is gaining a lot of recognition and importance. Financial planning is a step-by-step strategy that helps you reach all your set goals in life and for that you need a solid financial plan. A financial plan further serves as a guide in your life journey as it assists you in controlling your expenses, income, and investments.

Key Takeaways

Starting financial planning early makes it easier to achieve long-term goals through compounding and disciplined saving.
Set aside 6-9 months of expenses as an emergency fund to stay protected against unexpected financial setbacks.
Budget regularly to control your spending, avoid debt, and stay on track with your financial objectives.
Review your financial plan periodically and update it to reflect changes in life goals or market conditions.
Choose the right savings schemes like FDs, PPFs, or insurance plans to build a secure financial future.

Principal Purposes of Financial Planning and Control

Financial literacy is significant for investors and individuals who want to control and manage their funds accurately. Financial planning usually comprises all the activities related to budgeting, investing, spending, tax planning and copious more. Mentioned here are some of the primary purposes of financial planning.

Helps achieve long-term goals: Some milestones are pretty essential in every person's life. Be it owning a family car, an individual house, saving for your kids' higher education or their marriage. It becomes your obligation to fulfil these requirements and set milestones.

Financial planning and control can also help create a strait-laced financial strategy to suffice your economic purposes in a definite period. Hence, it becomes imperative for every person to control their expenses and perform financial planning to meet your set long-term goals.

It is likewise crucial that you plan all your goals early by investing in appropriate investment plans offered by banks. Investing funds early will always make it more comfortable to accomplish these long term goals and gain higher returns on your investments.

Provides hedge against inflation: Inflation today can be regarded as the most prominent killer of your purchasing capability. Inflation usually occurs when the demand for a product is more than its supply, and due to this increased demand, the prices also increase.

The biggest reason why every person must opt for financial planning is that it provides a hedge against inflation, especially during current times when the purchasing power of people is increasing and the market constantly keeps on fluctuating. This financial planning will always ensure that you bear the rising inflation while preserving your determinations unaltered.

Presents financial security against emergencies: When it comes to financial planning, preparing in advance is always better than regretting later in life. There can be unforeseen times in a person's life, such as a medical emergency that can drain all your finances in no time. It might leave you wondering why you did not plan for such emergencies beforehand.

Creating a financial plan and setting aside some funds for contingencies will always ensure that you and your loved ones always remain guarded against all sorts of emergencies.

Types of Financial Planning

Various types of financial planning that help to build and control your finances are as follows:

Investment Planning

Investment planning helps you grow your wealth by selecting the right assets based on your risk appetite and financial goals. It involves deciding where, when, and how much to invest. With clear short-term and long-term objectives, you can build a strong, diversified financial portfolio and secure your financial future.

Tax Planning

Tax planning allows you to reduce your tax burden legally while staying compliant with applicable laws. It involves making use of deductions, exemptions, and tax-saving investments. Smart tax planning helps you retain more of your hard-earned income and improve your overall financial efficiency.

Retirement Planning

Retirement planning ensures you enjoy a comfortable and financially secure life after you stop working. It includes estimating future expenses and building a strategy using pension schemes, provident funds, insurance plans, or even real estate. Starting early enables you to build a sufficient retirement corpus and enjoy peace of mind during your golden years.

Estate Planning

Estate planning lets you decide how your assets will be managed and distributed after your lifetime. It involves drafting a will, setting up trusts, and nominating beneficiaries. A well-structured estate plan helps protect your family's future, avoid legal complications, and ensure your wishes are respected.

Budgeting and Expense Management

Budgeting involves tracking your income and expenses to create a monthly financial plan. This helps you control unnecessary spending, save consistently, and avoid debt. Effective budgeting empowers you to achieve your financial goals faster and gives you better control over your financial life.

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Three Steps for Effective Financial Planning

With proper financial planning and control over your funds, you can get better clarity in life and enhanced peace of mind. Listed below are some steps you can follow for effective financial planning.

1. Define your financial objectives:

This is the initial step you must follow for creating an effective financial plan. Defining your long and short term financial objectives, quantifying and differentiating them based on needs and wants will present you with a better understanding of your funds and keep you financially protected against market changes.

2. Analysing your financial position

To create an effective savings plan, always analyse your solvency, debt and liquidity ratio. This analysis of your financial position will help you measure your risk appetite and create the best financial plan according to your income and expenditure.

3. Implementation of a financial plan

Once you create a financial plan, the next step you must follow is to implement and follow this plan religiously. Also, you must ensure to make necessary changes according to the market fluctuations to have better control over your funds.

Saving Schemes for a Better Financial Planning

If you are keen on financial planning and money control and looking for suitable investment options to save funds for the future, below are some of the top saving schemes you can choose for making a protected investment.

1. FD (Fixed Deposits)

All those looking for a secured financial instrument for investing their money can readily opt for a fixed deposit scheme. You can easily open an FD account with any leading bank or financial institution of your choice and deposit your funds for a set duration. Once the term of your fixed deposit gets completed, you will get a lump sum amount along with interest.

Learn: what is a fixed deposit and what are the benefits of including it in your investment plan.

2. PPF (Public Provident Fund)

PPF (Public provident fund) is another great investment alternative that has been remarkably successful across ages. The main reason why PPF is deemed a favoured selection is that it is an investment scheme initiated by the Indian Government and hence regarded as safe.

Apart from this, the interest rate on a PPF is around 8 per cent per annum, and the invested sum is exempted from tax under Section 80C of the Indian Income Tax Act, 1961. Not just this, but the interest collected on the PPF invested sum is additionally exempted from income tax.

The lock-in period for which a person can invest their funds in a Public Provident Fund (PPF) is around 15 Years, and once the set period of this scheme is completed, a person is allowed to withdraw their corpus. Apart from this, the investor also holds an option of retaining the scheme active by prolonging its duration by 5 years or any period according to their needs and specifications.

Having the correct perspective to comprehend financial knowledge and administering that knowledge guarantees that your economic future is picture-perfect. If you are looking forward to investing your funds in a savings plan, then you can choose from a wide assortment provided by Canara HSBC for attaining all your set financial goals.

Click to use: Power of Compounding Calculator

Did You Know?

Many retirement accounts offer target-date funds that automatically shift to safer investments as you get closer to retirement age.

Source: Investopedia

Common Mistakes to Avoid in Financial Planning

Some of the common mistakes to avoid in financial planning are as follows:

Lack of Clear Financial Goals

One of the biggest mistakes is not setting clear, realistic financial goals. Without knowing what you're saving or investing for, it’s easy to lose direction. Whether it’s buying a home, funding your child’s education, or planning for retirement, defining goals helps shape your financial strategy.

Ignoring Emergency Funds

Many people overlook the importance of an emergency fund. Life is unpredictable,as medical emergencies, job loss, or urgent repairs can disrupt your finances. Not having at least 6-9 months’ worth of expenses saved can force you into debt or early withdrawals from investments.

Delaying Investments

Waiting for the "perfect time" to invest often leads to missed opportunities. Time is a powerful ally in wealth creation due to compounding. The earlier you start, the more your money grows, and even small investments made early can result in significant returns over time.

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Inadequate Insurance Coverage

Relying solely on employer-provided insurance or ignoring personal insurance needs is a critical mistake. Insufficient life, health, or disability insurance can leave you and your family financially vulnerable in times of crisis. Insurance is not just a safety net—it’s a key part of financial planning.

Overspending and Poor Budgeting

Not keeping track of spending or living beyond your means can derail even the best financial plans. A lack of budgeting often leads to debt and reduced savings. Financial discipline is essential to ensure you're building, not breaking, your financial foundation.

Conclusion

Nowadays, financial planning is a necessity. With rising inflation, volatile markets, and ambitious life goals, having a well-structured financial plan ensures you’re in financial control. From budgeting and investing to securing your family’s future, it offers a roadmap to a stable and prosperous life. Start planning today.

Glossary

Emergency Fund: A financial reserve set aside for unexpected expenses like medical emergencies or job loss.
Fixed Deposit (FD): A low-risk investment where funds are deposited with a bank for a fixed period at a guaranteed interest rate.
Public Provident Fund (PPF): A government-backed, long-term investment scheme with tax benefits and stable interest returns.
Inflation: The rate at which the general price of goods and services rises, reducing purchasing power over time.
Financial Literacy: It is an understanding of financial concepts that helps to make informed decisions.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.