Earning money is hard and managing it is harder! This is where financial planning comes in. Financial planning is an organised and holistic process that helps you to invest your money wisely as per your financial goals. The plan is drawn after taking into account your various financial priorities, responsibilities and liabilities. Simply put, a financial plan first assesses your current financial situation, your financial goals and then draws up a roadmap for you to reach those goals.

A well thought-out and prudently drawn financial plan:

• Allows you to reach your financial goals in a set time period. Once your goals are defined and the time period for achieving those goals is set, then it becomes easier to achieve it.
• Ensures better management of money. A financial plan will keep an account of every rupee spent or earned. This will help you spend wisely while optimizing your savings.
• Helps you understand your priorities and risk preferences and invest accordingly. Priorities in life change with time and along with it your risk taking ability. A financial plan enables you to take into account these changes and accordingly make changes in your investment portfolio.
• Helps you to fulfill various responsibilities in life. We all have various family responsibilities to fulfil in life. And, we need finances to perform them. A diligently drawn plan ensures that you have adequate money to discharge your responsibilities.
• Helps you manage your assets and liabilities better. Financial planning can help you to manage your liabilities better by keeping an eye on your income and expenses. When you plan well, there is less chance of borrowing irresponsibly. Similarly, you can build assets for yourself over a period of time with proper planning.
• Helps you take better and informed financial decisions in life. Financial planning helps you understand your financial position better. And, based on the knowledge of your existing financial situation, you will be better equipped to take decisions.

• Step 1: Identifying your financial goals
  

  The first step in financial planning is to recognize your financial goals. Identify number of years after which each goal will arise for fulfilment and place a monetary value to it. Also, while creating the plan, do not take the present value of the goal, take the future value of the goal, taking into account the impact of inflation.

  Impact of inflation on present value of goals
  Values in INR

  Years	Estimated value at 3% annual rate of Inflation	Estimated value at 5% annual rate of Inflation
  2	1.06 lakh	1.10 lakh
  5	1.15 lakh	1.27 lakh
  8	1.26 lakh	1.47 lakh
  10	1.34 lakh	1.62 lakh
  15	1.55 lakh	2.07 lakh
  The above table shows the future value of a financial goal whose present value is Rs.1 lakh at varied inflation rates'

• Step 2: Estimate all income
  The next step is to get a rough estimate of your earnings and receipts during your life time. Here, not only your salary but also your income from other sources such as rent, investmens, etc. should be considered. You should also take into account the periodical rise/fall in your income over your life time.
• Step 3: Assessing the gap
  There is a possibility of a gap between your income and the value of all your goals. To meet this gap, you can either reduce the value of your goals or increase your savings.
• Step 4: Understanding your investment risk personality
  Each one of us has a different risk appetite. While a few of us are ready to take high risks in search of higher returns, some of us prefer to play it safe. To arrive at your risk appetite you need to take into account several factors that are both external and internal to you. These include your age, stability of existing income, number of dependants, your ability to cope with losses, perception of risk, etc. Together they make up your risk appetite. Financial experts categorise people in to three types of risk s- high, moderate and low or aggressive, moderate and conservative. Identify the category you fall in.
• Step 5: Invest as per your risk personality
  There are various investment options available in the financial market. Broadly they can be categorised into equity (e.g. shares and equity oriented mutual funds) and debt (debt oriented mutual funds, government bonds, company deposits, bank deposits, etc.). Plus, there are many non-financial investment options such as gold, real estate and art etc. All these instruments have varied degree of risks associated with them - some low, some high. Based on your investment risk personality, you can choose instruments to invest in. If you have a lower risk appetite, your portfolio should be more skewed towards debt oriented instruments. The opposite would hold true if you have a higher risk appetite.
  
• Step 6: Reviewing your financial plan
  Once you have drawn out a financial plan and have invested accordingly, it is equally important to review it periodically to ascertain whether the plan is in tune with your changing requirements. You need to identify any deviations from the plan and then take corrective measures to rectify it accordingly. You may also have to review your financial plan and investment pattern in view of major economic or policy changes.