Question

• Define the financial planning process
• List the elements of a good financial plan.
• Identify and discuss the three most important personal factors and the three most important economic factors that affect your financial planning decisions.

Answer 1

Financial planning process is mainly focused on management and assessment of financial resource utilization in an optimal manner for accomplishment of organizational objectives and goals. It comprises six stages as enumerated below:

· Establishment of goals and defining of planner-client relationship;

· Obtaining relevant data;

· Analysis and evaluation of data;

· Development of financial plans with alternatives and recommendations;

· Implementation of the plan;

· Monitoring the financial planning progress.

The main elements of a good financial plan are as follows:

· Effective management of cash flows;

· Effective management of investments;

· Sound tax planning;

· Assessment of insurance needs;

· Estate planning;

· Planning for retirement.

The most important personal factors are employment, household size, and marital status. These factors are considered to be very important for future planning. If one is married, he/she is most likely to have two incomes versus one income. The size of household also plays an important role in this regard. If any person has more number of members in his/her family, it could significantly impact his/her monthly finances. Moreover, planning to have a baby would lead to more expenses in the form of buying diapers, childcare, etc. Having a decent employment is also very important as it has a significant influence on how one pays for his/her daily needs.

The most important economic factors are rate of interest, inflation, and consumer prices. Lower rates of interest lead to increase in consumer spending while higher interest rates encourage people to save more and borrow less. Inflation is associated with rise in prices of goods and services and lead to lower purchasing power. Consumer prices are considered to have considerable impact on the worth of money and have significant influence on financial planning decisions.