Financial planning is a long-term process of wisely managing your finances so that you can achieve your goals and dreams. These goals may include

1. Buying a house
2. Saving for your child's education
3. Your daughter's marriage
4. Buying a car
5. Eventually planning for retirement

Over the last few years, terms like financial planning and personal finance have emerged as buzzwords of sorts. So what is financial planning?

Financial planning is a process through which an individual can chart a roadmap to meet expected and unexpected needs in life. The intention is to take necessary steps to ensure that the individual is equipped to accomplish financially what he has set out to achieve and is prepared to deal with contingencies as well. Two factors are responsible for the importance of financial planning – inflation and changing lifestyles. 

Finally, It’s All About Your Risk Appetite

Risk is the amount of money that the investor can afford to lose in the interim in his quest for a certain return on his investment. If an investor can afford to lose only a moderate amount of money, then his risk appetite is on the lower side. Below are highlighted some of the key points to keep in mind while evaluating your own risk appetite:-

1.  The choice of investments must flow from risk. However, remember that risk and returns are directly proportional to each other. Higher the risk, higher is the possibility of higher returns. The idea is to make your risk appetite, and not the investment opportunity, as the reference point.
2.  The risk associated with an investment has a lot to do with the investment timing. One reason why a lot of investors burn their fingers with the hot investment opportunities is mainly because, by the time they invest in an opportunity, it has already run its course and peaked.
3.  Another strange aspect of risk is that it decreases with time. As a prominent fund manager observed, equities are the riskiest assets over the short-term and the safest assets over the long-term. Thus, for long-term goals, go in for equities while debt products are the best for short-term goals.
4.  Investor appetite for risk does decline with an increase in age. Since equities can be volatile over the short-term, it is advisable to shift a majority of assets from equity to debt, as the investor approaches retirement age.

Basic Mantras of Saving Money

1.  Save at least 30-35 per cent of your monthly income in good quality savings instruments.
2.  Keep at least 3 months of your monthly income for emergencies. Alternately, get a good credit card with a self-imposed financial discipline to square off total   outstanding in the very next bill.
3.  Clear all your high interest debts first out of the savings that you make

And, the Basic Mantras of Making Money

“Compound interest is the eighth wonder of the world He who understands it, earns it …. he who doesn’t, pays it.”

~Albert Einstein

Research and history also indicates these four common investment mistakes:-

•  Investing without a plan.
•  Not diversifying well enough.
•  Ignoring risk.
•  Getting married to your investments.

IN A NUTSHELL

•  Inflation, i.e. a rise in the general price level, is one of the major factors that necessitate financial planning.
•  Financial planning aids individuals upgrade and maintain their lifestyles as also helps meet contingencies.
•  Setting objectives is the first step in the financial planning process. Each objective must be backed by a dedicated investment plan.
•  When faced with multiple objectives, prioritize and start off with the most pressing one.
•  Start early and make up for any deficit at a later stage. Don’t delay the investment process on account of small shortage of funds.
•  Always evaluate the risk in an investment opportunity before the return. Invest in line with your risk appetite, not the expected return.
•  Market linked investments like equities get less risky with the passage of time. In fact, Mutual Funds investing in Equity (shares) are the least risky if investment horizon is beyond 5 years!!
•  Risk is a very personal thing; there is no formula to calculate it.
•  Often at an advanced age, risk appetite declines.