This article has been sourced from the July 2007 issue of Money Simplified -- The definitive guide to Financial Planning.

Over the last few years, terms like financial planning and personal finance have emerged as buzzwords of sorts. Newspapers, magazines, television channels and just about every one under the sun seem to be talking about the importance of financial planning. So what is financial planning; more importantly, does it merit the attention that it is being given?

Financial planning is a process through which an individual can chart a roadmap to meet expected and unforeseen needs in life. Simply put, the intention is to take necessary steps to ensure that the individual is equipped to accomplish what he has set out to achieve and is prepared to deal with contingencies as well.

And yes, the importance of financial planning (especially in the present scenario) cannot be overstated. Among others, two factors are responsible for the same i.e. inflation and changing lifestyles.

Inflation is a situation where too much money chases a limited number of goods. This leads to a fall in the value of money. It is also expressed as a rise in the general price level. For example, a product that costs Rs 100 at present would cost Rs 105 a year from today, assuming that prices rise at 5 per cent. This is the impact of rising prices over one year; over a 30-Yr period, assuming that inflation continues to rise at 5 per cent, the same product will be available at Rs 432!

Financial planning can ensure that one is equipped to deal with the impact of inflation, especially in phases like retirement when expenses continue but income streams dry up.

The second factor is changing lifestyles. With higher disposable incomes, it is common for individuals to upgrade their standard of living. For example, objects like cars that were considered luxuries not too long ago, have become necessities today. Financial planning has a role to play in helping individuals both upgrade and maintain their lifestyle as well.

Finally, there are contingencies like medical emergencies or unplanned expenditures that an individual might have to cope with. Sound financial planning can enable him to easily mitigate such situations, without straining his finances.

Principles of financial planning

At its core, financial planning is not a very difficult task. All it takes is discipline and religious adherence to the principles of financial planning.

Discipline has a part to play at every stage, from setting objectives to actually executing the plans that are meant to achieve those objectives. In fact, an adhoc approach while dealing with finances is one of the major reasons for the financial distress that individuals find themselves in.

Setting objectives, investing in line with one's risk appetite and asset allocation are some of the fundamental principles of financial planning.

In conclusion, it can be stated that achieving financial nirvana isn't as difficult as it is often made out to be. To get there, all one needs to do is, stick to the basics of financial planning.

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