We make decisions about money throughout our lives. A business may want to purchase a new piece of machinery, a student may require a loan to continue his education, a job holder may need to save money for retirement, a parent may want to save for their child's education, and an investor may want to invest in an piece of real estate or buy stocks. This process of managing money in order to fulfill tomorrow's needs is termed financial planning.

Financial planning is like creating a road map based on available resources to achieve your goals. In businesses it is usually done at the highest levels, within the C suite.  For individuals, a financial planner or adviser generally does this service but a financially savvy person can also do it by himself or herself.

The Process of Planning

Financial planning doesn't only mean investing but is also the vehicle through which you will reach your destination. To clarify, just assume you want to travel five miles from your current location. Financial planning is not just renting a car or taking the bus to travel these five miles.  It also involves identifying where you are standing right now and figuring out that you need to go to a destination five miles away. In addition it also helps you set the right direction and lets you take meaningful financial decisions in order to get there.  Financial planning overall is a continuous process of evaluation and action in order to achieve your financial goals.


The Three Phases of Planning

The three phases of financial planning include:
1.  Phase 1:  Identifying where you are standing right now.  This means evaluating your current financial position and your existing resources.  You will need to start off my identifying the available resources that you have.

2.  Phase 2:  Where do you want to go?  This involves setting your destination or creating goals for yourself.  For example your financial goals may include purchasing a new set of machinery, purchasing a home, saving for your children’s education, etc.  Setting goals and objectives is key in this second phase.

3.  Phase 3:  Developing a plan and executing on what you must do to attain your goals and reach your final destination.  This includes understanding what financial strategies/investments might be available, assessing your appetite for risk and adjusting your financial strategies over time.  Questions you will need to consider here are:  How much should you be saving each month?  Will you require outside financing such as a loan or an equity issue for businesses?  What amount of risk am I comfortable with in my plan and my investments?  What investment vehicles are out there for my current resources?

Financial models are helpful in identifying your current resources and measuring your progress in achieving your end goals.  As an individual if you do not have any knowledge or expertise in this, using the assistance of a professional financial planner or adviser can be helpful.  But for both businesses and individuals, financial planning is the overall journey of assessing your start and end positions and then deciding on the optimal strategies to help you achieve your goals.  As such it also involves constant monitoring and adjustments.


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