Question

In: Finance

1.      The personal financial planning process involves the following: Step i.       Determining your current financial situation...

1.      The personal financial planning process involves the following:

Step

i.       Determining your current financial situation

ii.      Define your financial goals.

iii.     Develop a plan of action.

iv.     Implement your plan.

v.      Review your progress, reevaluate, and revise your plan.

Evaluate the practical aspect of the above planning process. (300 words)

Solutions

Expert Solution

Financial planning is like an art. The more you explore, the more interesting it gets. The process of financial planning can be divided into simple steps which are discussed below in detail:

  1. Determine the current financial situation : This step involves evaluating your current financial situation where you determine the actual sources of finance/income you currently possess. This is the step where one has to determine the actual cash/bank balance possessed.
  2. Define your Financial Goals : This step involves defining and evaluating your financial goals which includes determining as to "where do you want to see yourself after n number of years". It also involves determining the risk you are ready to bear. Further one also has to define a standard in terms of return required. For the one planning to invest for long term, Real Estate can be an option. Further for a risk averse person, investing in preference shares or Government Bonds might be a good option. In short we have to decide in this step as to what purpose of ours do we want the financial planning to solve.
  3. Develop a plan of action : On the basis of the decison taken at 2nd step, we have to make a plan most suitable for us. This is the step where we decide the options where we have to invest. It includes making a portfolio of different stocks availble. Portfolio consists of combination of debt and equity in such a manner that it helps in mitigating the risk.
  4. Implement your plan : This is the step where we actually have to implement the plan. For instance, say we have decided to invest in shares. So this step would involve opening a Demat Account and purchasing the desired shares.There are various options available to open a Demat account online and trading the shares.
  5. Review your progress, Re-Evaluate and revise your plan : This is the most important step in the entire process which many seem to neglect. After having invested the money, one has to regularly review the progress which include determining the return on investment and comparing it with our predefined standard as well as other investments available in market. This need for this step arise due to the dynamic nature of the market. Therefore we need to regularly review the progress and revise our plan, if needed.

  


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