Financial plan is a comprehensive evaluation of an individual's current and future financial state by using currently known variables to predict future cash flows, asset values and withdrawal plans. This often includes a budget which organizes an individual's finances and sometimes includes a series of steps or specific goals for spending and saving in the future. This plan allocates future income
to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings. A financial plan is sometimes referred to as an investment plan, but in personal finance a financial plan can focus on other specific areas such as risk management, estates, college, or retirement. The Benefits of Financial Planning: Financial Planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. For example, buying a particular investment product might help you pay off your mortgage faster or it might delay your retirement significantly. By viewing each financial decision as part of the whole, you can consider its short and long-term effects on your life goals. You can also adapt more easily to life changes and feel more secure that your goals are on track. Start with your financial goals: You have to choose investments, write down your financial goals-retirement, children's education and so forth. For each goal, be sure to consider:
A.Your risk tolerance
B.Your time frame
The more time you have to reach your goal, the more choices you have. It's much easier to tolerate risk when you have plenty of time to ride out short-term volatility, the ups and downs in the value of your investment. A long time frame means you can choose to go after the higher long-term returns that equities have historically delivered. Another advantage of a long time frame is that the more years your money compounds, the less you need to save to reach your goal. Next understand your investment options: While there are hundreds of mutual funds to choose from, they mostly fall into 3 categories.
1.Equities (also called stocks)
2.Fixed-income (also called bonds)
3.Cash equivalents (a type of liquid investment such as a money market fund)
The risk of losing money with cash-equivalent investments is low, but so is the long-term return as compared with equities. With equities, the risk of losing money in the short run is much higher, but the potential for higher long-term returns is also there. The best asset mix is a very personal decision. One size definitely doesn't fit all investors. If you're a long-term investor, investing solely in cash equivalents could leave you open to the risk of inflation. Short-term investors on the other hand, need to be more concerned with the risk posed by volatility. Strategies for reducing risk:
Successful investors use several strategies to reduce their investment risk including:
1.Diversification
2.Asset allocation
3.Rupee-cost averaging
