Financial planning: It pays to start right

Contrary to popular perception, financial planning involves much more than mere budgeting and is definitely an exercise which requires expert attention. Given the immense complexities of life, a complex financial marketplace, multifarious investment instruments, multiple short term and long terms financial goals, planning for a safe and worry free financial future is not an easy job.

There are many steps that go into the making of an efficient and truly effective financial plan. Proper goal setting and assessing one’s correct net worth are two of the most important principles of any financial planning process.

The first step is often the identification of the short and long term financial goals. One thing that should be kept in mind while deciding on financial goals is that the more tangible and precise the goals, the easier it is to plan for them.

Short term goals can be the things that you want to accomplish within a shorter time span say 3-5 years, like buying a car or a vacation etc. The long term goals have to be achieved over a period of 10 to 20 years or more like planning for daughter’s marriage, kids education, retirement planning, buying a house etc.

Assigning priorities to goals is another major thing that one should not overlook. Privatization of your goals will help you allocate your valuable financial resources in a way that is most profitable and allows you to accomplish the more important ones. For example, if you owe a huge credit card bill, it should be one of your priorities to get rid of this high interest debt before going on a vacation.

After the process of goal setting has been done, one needs to assess his current situation and get an accurate estimate of his or her existing net worth. This will require the listing of all the assets and liabilities one owes. Assets can be your bank balance, investment in stocks, mutual funds, gold, property, insurances, vehicles etc. And liabilities are the loans to repay (they could be home loan, personal loan, credit card debt, car loan).

Begin by estimating the value of your entire assets. The next step is to get an idea of the debts or liabilities you owe and subtract your liabilities from your assets. This will help you arrive at your net worth.

This exercise will give you a clear picture of what you have and what you owe. As a first step towards correcting the financial situation it is always better to get rid of costly debts such as credit card bills, personal loans, car loans etc. as soon as possible.