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What is financial planning?

Key takeaways

• Financial planning involves defining your goals, understanding your financial picture, and taking steps to advance those goals.
• Financial planning professionals can help you with a variety of needs, including budgeting, investment management, and retirement planning.
• Wherever you are on your financial journey, a sound financial plan can give you peace of mind and confidence.

Financial planning can help you chart a course to get what you want out of life. By helping you figure out how much money you have and where it should go, financial planning is a way to set goals and get on a path to achieve them.

Feed your brain. Fund your future.

Financial planning is creating a comprehensive plan to reach your financial goals. By considering your whole financial life, it provides guidance on reaching both small, short-term targets as well as larger, long-term ones.

You can create a financial plan on your own or work with a professional financial planner who has the knowledge and time to integrate many aspects of finances into a plan, can identify risks and opportunities, and can help keep you on track in making progress toward your goals.

Why is financial planning important?

Financial planning is important because it helps you identify and prioritize your goals. It also aims to give you a complete picture of where you stand financially and identify changes you may need to make to increase the likelihood of achieving your goals—for example, which account types and financial products make sense for your personal situation. Some advantages of investing like compounding potential returns are realized over time so having a plan and starting early is important for the long term.

A financial plan can also help you uncover vulnerabilities, like not having enough saved in emergency savings or being underinsured. And it may make you feel more confident and comfortable with the choices in your investment portfolio when the markets go up and down. That's why having a financial plan is important for people of all ages and financial backgrounds—not just older, wealthy people. Note that a financial plan is not a set-it-and-forget-it exercise, but an ongoing process that changes as your circumstances do. Your goals as a single person may be different from those of a married couple with children, for example.

Types of financial planning

Financial planning is a broad term that can cover a range of different techniques and goals. Most financial plans include multiple types of financial planning to take a holistic view and may address some or all of the following.

Cash-flow analysis

You may think of this as budgeting . Cash flow analysis helps you get a sense of what you have coming in each month and how you're using it. You need positive cash flow so that you can generate funds to pay down debt, build emergency savings, or invest. By getting into the nitty-gritty of your cash flow, you can make conscious choices about where you want your money going and identify areas you may be able to trim or cut out entirely.

Debt management When you have multiple types of debt repayments competing for your dollars (think: credit card debt, student loans , and a mortgage), it can be difficult to figure out which you should prioritize paying first. Financial planning focused on debt management can help you identify ways to lower interest payments and strategize ways to repay your debts that work best for you while keeping you on track to meet your other financial goals and budgeting demands.

Retirement planning We all know we should be saving for later, but the question of how much to save for retirement —and in what accounts—can be tricky, particularly as you get closer to the age you hope to set up your permanent out-of-office message.

Retirement planning for those decades from retirement may be as simple as working their way up to contributing the maximum pre-tax salary allowance to a retirement account, like a 401(k) or individual retirement account (IRA) . For those near retirement, it may involve how to generate retirement income, such as figuring out which retirement accounts to draw from first, covering essential expenses, and how to manage Social Security income. A plan could give you peace of mind that you won't outlive your assets.

Investment planning Both retirement savers and those who are looking to build wealth outside of a retirement account can benefit from investment planning that aligns with their time horizon, financial situation, and risk tolerance . Investment planning can help you analyze and manage your portfolio holdings to better ensure your investments are working as well as they can for you. It may also reinforce the nature of market cycles—short-term downturns are expected but have historically always been followed by upturns, for example. Good investment planning may help keep you calm during rough stretches in the market and resist panic selling.

Education planning There are no ifs, ands, or buts—paying for an education is expensive. And it becomes even pricier if you're hoping to set aside enough for multiple children's educations. Education planning helps you figure out how much you need to save and the best strategies and accounts to cover education costs from pre-K to post-grad.

Tax planning If you're a W-2 worker (most 9-to-5ers are) without a complex financial situation, you may not need much more to do your taxes than self-service tax software. But for those with more complicated finances or people trying to determine the best way to manage income in retirement, financial planning can help you figure out the most tax-efficient way to manage your money. From taking advantage of tax deferral for savings goals, to qualifying for deductions and credits, to minimizing taxes to heirs, taxes touch many areas of financial planning.

Estate planning Don't let the name fool you. When it comes to financial planning, estate planning is less about sprawling manor homes and more about making sure you make your wishes known through documents like wills and trusts. Many estate planning techniques start with careful planning while you're living. Planning for what happens after you or your partner is gone can be hard to think about, but it's an important step in financial planning for all types of people, even those who are younger and who don't have large bank balances. It also helps you plan for who makes decisions if you become unable to and who becomes guardian for your children if necessary—important things regardless of wealth level.

Insurance planning Managing risk is fundamental so you don't encounter financial catastrophe that prevents you from achieving your goals. You probably know the importance of having health insurance, but there are countless other types of insurance that might help you during times of hardship. Financial planning can make sure you understand how disability and  life insurance , as well as long-term care coverage, among other types of insurance, fit into your financial picture to help protect you and those you love.

How much does financial planning cost?

How much financial planning costs depends on whether you decide to go it alone or work with a professional. If you DIY, there are low- to no-cost online tools and resources that can help you put together your own financial plan . For instance, Fidelity has a range of online calculators you can use to estimate how much you need to save to retire by a certain age, or you could a use a robo-advisor to manage your investments. If you prefer to work with a pro, they may charge based on a percentage of the assets they handle for you, by the hour, or a one-time flat fee.

How to create a financial plan

Ready to start financial planning ? Check out our guide on how to make a financial plan . As you draft your plan, either on your own or with a pro, remember that a solid financial plan is more than just numbers. It's a map that puts you in the driver's seat to fund the life you envision for yourself now and in the future.

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Learn Personal Finance Financial Planning: Definition, Importance, And Benefits

Financial Planning: Definition, Importance, And Benefits

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Our life is like a rollercoaster ride, with many ups and downs, and financial planning is a tool that can help you smoothen your ride. Whether you have started your job or are in your 30s or 40s, financial uncertainties can come from anywhere, so it is important to have a good financial plan to secure your future.  Financial planning helps you build a roadmap for your financial journey to achieve your financial goals.

This blog will explain key financial planning details, importance, and benefits. We will also explain the steps to go about financial planning and create your own financial plan to achieve all your goals.

What Is Financial Planning?

Financial planning is the process that helps in managing your financial resources to achieve your long-term or short-term goals. It entails assessing your current financial situation, establishing financial goals and risk appetite, and devising a strategy to achieve those goals. It helps you in making informed decisions to allocate your funds.

Simply put, financial planning helps you keep your finances in control to achieve all your goals and desires. To understand more about financial planning, let’s take a closer look at its types, objective, importance, and benefits.

Financial Planning Types

Financial planning is done to achieve your future goals, including investment, tax saving, retirement, education, etc. The basis on these, some of the common types of financial planning are: 

• Investment Planning: Under investment planning, strategies are made for future investments. You can plan for the type of investment and the proportion of investment you want. You can allocate your funds to various investment vehicles such as mutual funds , NPS, ELSS , etc. 
• Tax Planning: Financial planning also helps in solving your tax issues. Under tax planning, financial strategies are made to decrease tax liability. For maximum tax savings, you can plan to invest in fixed deposits, NPS, PPF, ELSS, etc.
• Retirement Planning: Under retirement planning, strategies are made to ensure you retire rich. At the time of retirement, you need a huge corpus to fund your lifestyle for 20-30 years, and retirement planning helps achieve it. It will help you estimate the amount you would need to retire and how much you should invest in making it possible. 
• Budgeting : Under budgeting, your income and expenses are analyzed, and on the basis of that, financial plans are made. It is focused on minimizing costs and debts and increasing your disposable income.
• Insurance Planning: Insurance provides financial assistance in times of emergency. Insurance planning helps you identify the type of insurance you require and how much your insurance should cover.

Education funding planning: Financial Planning for education has become increasingly important as the expense of higher education in India has skyrocketed over the years. Financial Planning in advance for education expenses ensures that you don’t compromise on your goals.

Whether it’s for a child’s college education or your own academic aspirations, education funding planning helps you to accumulate funds for future education.

Estate planning: Estate planning is basically a financial plan that helps you pass on your assets smoothly to your loved ones after your death. It helps to avoid family feuds and disagreements about who gets what. 

Making a will is an important part of estate planning, as it helps in avoiding family feuds regarding the property or assets. It gives the roadmap regarding the distribution of assets among the family members after your death. 

Wealth creation: Financial planning also helps in wealth creation through effective budgeting. It helps you to track your income and expenses. By keeping track of your spending and controlling unnecessary expenses, you can have more surplus for the investment.

You can invest this surplus in various investment instruments, such as equity, mutual fund, NPS, etc., to generate more wealth in the long term.

Objectives of Financial Planning

• Preparing a budget: Financial planning helps you prepare the personal budget that fits your financial plan. It enables you to track your income and expenditure and minimizes your expenses. 
• Determine current financial position: Financial planning helps determine your current financial position by analyzing your current income, expenses, and liabilities. It considers your future goals and helps you create an investment plan to achieve them.
• Setting up financial goals: It helps you identify your financial goals. These goals may include retirement savings, buying or constructing of home, children’s education or marriage, etc. 
• Setting up financial plans: Financial planning allows you to take action to achieve your short- or long-term goals. It lays down the various investing strategies you can use to achieve your financial goals.
• Review financial plans: It is mandatory to monitor your financial plans regularly so that it is aligned to achieve your goals. Financial planning helps you in reviewing your portfolio performance. 

Financial Planning: Importance And Benefits

All of us have a long list of things that we want to do with our money. This could include saving tax, buying the latest smartphone, laptop, car, and properties, saving for children’s education, retirement planning, and so on.

However, more often than not the money we have with us is inadequate to fulfill all our goals. So, it becomes crucial to be clear about our priorities. And to that end, financial planning can come in handy.

The importance of financial planning is that it provides direction to our goals. Financial planning helps you understand your goals better in terms of why you need to achieve these goals and how they impact other aspects of your life and finances. Moreover, financial planning also brings benefits like a smoother transition into different life stages, staying prepared for emergencies, better tax planning, etc.

Let’s look at the benefits of financial planning in detail.

Smoother Transition Into Different Life Stages

Our priorities and responsibilities keep changing when we move from one life stage to the other. Financial planning helps us figure out how we can manage our finances at different stages of life such as bachelor days, married life, post-retirement life, etc.

Helps Stay Prepared For Emergency

Creating an emergency fund is a critical aspect of financial planning. With an emergency fund, you ensure that you have enough corpus that can help you survive for at least 9-12 months of your monthly expenses. This way, you don’t have to worry about money in case of any family emergencies, pay cuts, or job loss.

Helps In Calculating The Right Insurance Cover

Term insurance and health insurance are extremely useful in the case of an unfortunate demise and a health emergency, respectively. But what is important is to take the right insurance cover. A financial plan will take into consideration multiple factors like your income, expenses, loans, responsibilities, etc., and help you decide on the right insurance cover.

Better Tax Planning

Many of us pay a substantial amount of our salary as tax. But there are legal ways to lower the tax outgo. In fact, the Indian Income Tax Act provides various investment options to build wealth with the saved tax. But most of the time people make the mistake of making tax-saving investments that are not in line with their goals. It happens because they do not consider tax planning to be a part of a financial plan. By planning your taxes in advance, you can identify suitable tax-saving products, reduce your taxable income and build wealth for the long term.

Attain Peace Of Mind

Financial planning takes care of many moving pieces of your finances. You have adequate funds to manage your money. There is insurance to deal with unfortunate events. And you have a plan in hand to achieve long-term and medium-term goals. All these things give you much-required peace of mind as you are managing your money efficiently.

Now that we know the importance and benefits of financial planning, let’s understand the steps of financial planning with examples.

4 Key Steps Of Successful Financial Planning

To help you get started with financial planning, let’s take a look at the key steps involved in the process. We will describe in brief what these steps are and then explain them with an example.

Step 1 – Set SMART Goals

This step in financial planning involves defining your financial goals. And while you do it, you have to be SMART (Specific, Measurable, Attainable, Relevant, and Timebound). For example, just saying that you will retire rich is not a SMART goal. But accumulating Rs. 5 crores for post-retirement life by the age of 60 is a SMART goal.

When you write down goals this way, it helps you prioritize the most important goals in your life. You also become realistic about your goals and work vigorously to achieve them.

Take for example the above goal of accumulating Rs. 5 crores by the age of 60. Say, the person is 35 years old. So he has 25 years to achieve this target. Now, all he needs to find out is how much he has to invest and what kind of returns he needs to earn.

Here is a table that explores various possibilities to reach the target of Rs. 5 crore in 25 years:

Step 2 – budget your expenses.

To ensure that you get to your goals securely, you have to invest as much as possible. It will be possible only when you cut down on discretionary spending or avoidable expenses and use those savings to invest more.

Step 3 – Find Out Where To Invest 

This step involves figuring out where to invest. For instance, if you are investing for long-term goals you can invest in equities, whereas for short-term goals, you can invest in low-risk products like fixed deposits or Debt Funds .

Overall, your investment plan will have a mix of different assets like Indian equity, international equity, debt, and gold. The mix of this asset allocation will depend on your risk profile, which involves assessing how much risk you can take. For instance, you need to find out if you are comfortable with a 20-30% decline in your portfolio . If the answer is yes, you can invest in equity. But if the answer is no, you have to minimize your allocation to equities.

This assessment of how much risk you can take is done by factoring in multiple variables such as your age, income, lifestyle, loans, responsibilities, etc. Determining your risk profile also involves assessing your personality based and how you react to adverse events.

The old-school way of risk profiling an investor has been labeling them as Conservative, Moderate, or Aggressive. At ET Money, we never understood that. Nor we do now. We looked at this deeper and came up with a dynamic risk score. You can find out your risk score and unique personality here .

Step 4 – Monitoring And Rebalancing

An investment plan is not a one-time thing that you create and forget. After making the investment plan, you will have to keep tracking your progress toward different goals. From time to time, you will need to weed out the underperforming investments and include emerging investment opportunities. You will also need to rebalance your asset allocation  from time to time. Otherwise, your investments may digress from the original asset allocation and consequently lead to counterproductive outcomes.

Reasons for Financial Planning

Financial planning is a very important part of every individual, as it helps to achieve financial goals, secure their financial future and provide financial stability. Here are some of the reasons for making a financial plan:

• It helps you to set up your financial goals, such as buying a house, car, savings for children, etc, and work toward specific financial goals. 
• It helps you create a budget that enables you to cut unnecessary expenses, reduce debts, and increase disposable income. 
• It encourages regular saving and investment, through which you can accumulate a good corpus in future by investing regularly. 
• At retirement, you require a regular flow of income. With you can build a good retirement corpus, through which you can have regular income to fund your daily expenses.
• It helps you to minimise your tax liabilities by allocating your money to various tax-saving investments. 

Financial Planning Tips for Different Sections

Financial planning enhances financial stability and helps you achieve long-term financial goals.

So, irrespective of whether you are a salaried individual planning for retirement or self-employed, it is important for everyone to have an effective financial plan to secure your future. 

Let’s understand how the different types of individuals can build an effective

Financial Planning for Salaried Employees

For salaried employees, having a robust financial plan is crucial to achieving financial goals. Here are some tips for having a good financial plan: 

• You can create a budget to track or manage your savings, expenses, and investments. 
• Consider investing in mutual funds, which offer you a diversified portfolio of investments. 
• Ensure you have health insurance coverage for yourself and your family to avoid future unexpected expenses. 

Financial Planning for Retirement

If you are planning for retirement, you should have perfect financial planning that ensures you receive regular cash flow after retirement. Here are some tips for retirement planning: 

• You can consider investing in NPS (National Pension System). It is a market-linked investment offering a diversified portfolio of various asset classes. It comes with the dual benefit of taxation and a regular pension after retirement. 
• If you don’t want to take higher risks, then you can consider PPF (Public Provident Fund). It is a government-backed tax saving scheme that offers you a guaranteed investment return.

Also Read: Retirement Strategies to Have Regular Income

Financial Planning for Self-Employed Individuals

If you are self-employed, it is also important to have your financial plan to remain protected from any financial insecurity in future. Here are some tips for self-employed individuals: 

• You can create your own budget and track your income and expenses.
• You should explore investment options like mutual funds to have a decent corpus for your future. 
• You should have adequate health insurance coverage for yourself and your family members. 

Difference Between Financial Planning and Wealth Management

Financial planning is the process of making a comprehensive plan for managing day-to-day expenses and income to achieve your financial goals. While wealth management is concerned with managing your existing wealth and making changes in your portfolio to grow your wealth.

Let’s understand how financial planning and wealth management are different from each other by the following table:

Financial planning is all about designing a trip that gets you safely to your destination. In this blog, we have explained the importance of financial planning. We have also explained how can you go about financial planning with examples. But a financial plan on paper is of no use unless you start acting on it. The earlier you start acting on your financial planning, the less complicated and the higher the chances of achieving your financial goals. So why the delay?

We hope you found this article useful. If you did, please share it with your friends and family and help us reach more people. If you have any questions or you need clarification on what we have written in this blog, do ask us in the comment section below, and we will respond.

FAQs for Financial Planning

Some of the key elements of the financial plan are budgeting, insurance coverage, tax planning, debt management, long-term savings, etc.

The objective of a financial plan is to provide a roadmap to manage your financial resources to achieve your financial goals in future.

The comprehensive financial plan is a detailed plan that encompasses all components required in the individual’s financial journey. It goes beyond merely setting goals and creating budgets. It includes planning for financial goals, tax planning, estate planning, retirement planning, insurance coverage, and short and long-term investment strategies, etc.

It is important to create a financial plan, as it provides you with the roadmap to manage your finances, which helps you to achieve your financial goals in the long term. It helps you prioritise your expenses and save for the future to have financial stability.  

Personal financial planning is the same as normal financial planning, wherein you make a roadmap about managing your income and expenses to achieve your financial goals.

Budgeting refers to the financial process in which you track your income and expenses, and based on these, you allocate your money. Here, the primary objective is to minimise expenses, eliminate unnecessary expenses, and increase disposable income.

Financial planning in financial management is the strategic process of aligning your financial resources and decisions with your financial goals. It includes aspects like setting financial objectives, risk assessment, investment planning, and considering tax implications. It’s about creating a holistic strategy to maximise the efficiency and growth of your financial assets.

Long-term financial planning refers to making a financial strategy for a longer tenure, typically five years or more. It may include making plans for long-term goals such as buying a home, funds for children’s education or marriage, etc.

Short-term financial planning refers to making a financial strategy for a shorter term, typically 1 to 3 years. It can be done for various short-term goals such as savings for vacation, debt payment, paying bills, etc.

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The Importance of Financial Planning: 5 Benefits

Whether it’s at the forefront of our minds or in the background, saving money is one thing we know we should be doing. However, it’s easy to push it to the side. We know life moves at a fast pace and reaching financial goals won’t happen overnight. To achieve your goals, it takes strategy and planning – it can help to think of it as a marathon rather than a sprint. Once you understand the basics of personal financial planning , working with a professional that understands your unique needs and goals is a good way to start off strong. A financial advisor can help you set and assess goals, avoid emotional investing , make recommendations based on your risk tolerance, monitor your progress and develop a comprehensive financial plan.

Financial planning helps you see the big picture. A plan can help you become more strategic in your savings. No matter your age, stage of life or level of wealth, creating a customized financial plan can put you on the path toward reaching your financial goals and keeping up your financial health .

5 Benefits a Financial Plan Can Offer

Identifies gaps.

Through the personal financial planning process, you’ll discuss your current savings, income, investments, insurance coverages and more. During these conversations, gaps in current strategies can be identified. A crucial benefit of creating a plan is having a comprehensive view of your financial situation. When you can see the whole picture, it’s easier to see what’s missing.

Helps You Stay on Track

When life changes and you hit a bump on your financial roadmap, it’s easy to get off track. Sticking to your financial strategy can keep you on track and avoid potential potholes on the path to reaching your short and long-term financial goals .

Balances Different Priorities

The power of long-term financial planning is the ability to prioritize and balance financial goals like saving for a child’s college education while also putting money away for your retirement dreams. A good financial plan can help you navigate the choice between saving money for college or retirement .

Navigates Market Volatility

The ups and downs of the market may leave you feeling uneasy. Headlines and water cooler talk can leave you questioning your strategy, but a well-crafted financial plan is designed to help meet your financial goals and weather the highs and lows . With the help of a financial advisor, you can create a financial plan that boosts your confidence in your long-term strategy and helps you worry less about market downturns, emergency expenses, healthcare and long-term care costs, or outliving your retirement income.

Reduces Stress

Thinking about the future can be stressful to say the least. Especially when it comes to money. Will I have enough saved for retirement? How will I afford to send my children to college? Will I ever have enough money to travel the world? Once the doubt sets in, the questions begin to grow. A comprehensive, written plan gives you a clear picture and direction for ways to reach your goals. With the whole picture in mind and a strategy in place, you’ll be more confident in your financial future. 

Investing in Your Financial Future

Whether you’ve dreamed of a retirement filled with traveling and relaxation, or you want to send your children or grandchild to college, you have big goals for your future that take planning and preparation. Taking crucial steps now can help you reach the financial future you’re working hard to achieve.

When you’re ready to sit down with a professional and dive into the financial planning process, connect with a Farm Bureau advisor to get started. Our advisors take the time to get to know you and work to develop a strategy that puts your needs and priorities first.

Want to learn more?

Contact a local FBFS agent or advisor for answers personalized to you.

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• What is financial planning? 

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Financial planning basics: How to create a financial plan

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• Financial planning is a practice that helps you track and manage your money with the purpose of reaching your financial goals.
• Create a strong financial plan by setting goals, tracking cash flow, budgeting, investing, and paying down debt. 
• A CFA or CFP can assist you in creating a personalized financial plan.

Life may be full of twists and turns, but a strong financial plan can help you stay on track toward reaching your goals. From paying off your student loans to buying a house, a comprehensive individualized plan is the best way to go. 

Financial planning is a broad and encompassing practice that aids you and your family in better managing your money and preparing for potential risks. No matter what your current financial situation is, a solid financial plan offers guidance and insight beneficial to all households.

Read about our picks for the best financial advisors here.

What is financial planning? 

Financial planning is essential to achieving long-term and short-term financial goals, while also preparing you for potential future risks and obligations. No two financial plans are the same. Your plan should accurately reflect your own financial needs, goals, and best course of action. 

"The purpose of a financial plan is to help clients — whether it be an individual, family, or business — achieve their financial goals and objectives by creating a structured roadmap for managing their finances effectively," says Chloe Wohlforth, CFP, Partner at Angeles Wealth Management . "A well-crafted financial plan considers a person's current financial situation, future financial goals, and risk tolerance."

Financial plans often address retirement savings, wealth-building strategies, emergency savings plans, tax optimization strategies, college funds, and debt consolidation .

To create a comprehensive plan, you'll need to thoroughly evaluate your current financial situation, such as household income and debt (including car payments, loans, and credit card debt). Most plans tend to involve budgeting, saving, and routine investing. 

You can craft a financial plan yourself or enlist professional assistance. Search for the best online financial advisors or planners, or look for in-person advisors.

"Financial advisors can help you create a financial plan by understanding your goals, values and risk tolerance, and then building a customized path that they can guide you along to enrich your life to its fullest potential," says Jordan Gilberti, CFP and senior lead planner at Facet.

Financial planning isn't as hard as you might think. Here are six steps you can take to create your own financial plan. 

1. Set financial goals

The first step in creating a strong financial plan is identifying your goals. Whether by yourself or with a partner, you should know what you're aiming for. 

"Set your goals and priorities by envisioning a future for yourself over the short, medium, and long term, and what you would like to achieve financially," says Gilberti. "Get yourself organized by gathering all relevant financial documents, including your investment accounts, insurance policies, debts, and other assets."

You can start by asking yourself: What do you want to achieve in five years? How about in 10 or 20 years? Are you looking to buy a house? Have kids? Plan a huge trip? 

Financial planning should feel intentional, and you can more easily draw motivation from clear, obtainable objectives. Consider at least three goals with the following information: 

• How much will it cost? If you're looking to save for a house or pay off student debt, for example, you should have a number you're aiming for. For instance, how much will it cost to buy a house and how much are you needing to save to make it happen?
• What is my deadline? Once you know how much you need to save, you'll need to set a realistic timeline. For example, how long do you think it will take to save up for a down payment on a house? 
• Where should I store the funds? While you can store all your funds in the same bank account, you may want to separate your funds into different savings accounts or brokerage accounts. 

2. Track your finances

What's coming in and what's going out? Before you can start responsibly budgeting, review your cash flow to reveal more ways to save. While some expenses — like rent or gas — are mandatory expenses, you may uncover nonessential charges that are draining your funds.

"The best way to budget is to ask for help. Often clients don't budget because they don't know where to begin. An advisor can help you think about your expenses in different categories. What is discretionary, what is non-discretionary? What is an expense that might be costly now, but only for a fixed amount of time?" says Wohlforth.

Once you have a grasp on your spending habits, you can budget. A beginner-friendly method of budgeting is the 50/30/20 rule , which is suitable for both consistent and irregular-income households. Basically, this plan is a rule of thumb that designates 50% of your income to mandatory expenses, 30% to wants, and 20% to debt or savings.

But keep in mind that everyone's financial situation is unique and the 50/30/20 budget plan won't be suitable for everyone. 

3. Create an emergency fund

Part of establishing a realistic budget is setting aside cash in case of emergencies.

"An emergency fund is typically a savings account that serves as a safety net from unforeseen financial difficulties that you may face throughout your life," Gilberti says. "Examples may include a job loss, disability, home appliance breaking, and more."

Emergencies are unexpected, so having the extra funds on hand can help you pay for medical emergencies and other sudden bills. An emergency budget may also protect you against racking up credit card debt and interest. 

Check out Insider's picks for the best budgeting apps

4. Reduce and manage debt

Reducing and managing debt is a crucial step in financial planning. Even if you're storing a good chunk of cash in a savings or brokerage account, high-interest debt will weigh you down. The longer your debt accumulates interest, the more money you'll lose in the long run. 

You may want to pay down expenses like credit card balances, student loans , and car payments sooner rather than later. You may want to include regular debt payments in your budget plan. 

5. Diversify your investment portfolio

One of the best ways to save for future financial goals and build wealth is through investing. While investing can be risky, a diverse portfolio of stocks, bonds, ETFs, and alternative investments can significantly lower the risk. There are plenty of beginner-friendly online brokerages, robo-advisors, and investing platforms.

The best investing apps for beginners and the best online brokerages for beginners are low-cost and best for passive traders. These sites also allow you to customize your investing portfolio based on your financial goals, risk tolerance, and time horizon.

Automatic investing platforms like SoFi Invest , Fidelity Go , and Wealthfront are also ideal for new investors. Robo-advisors are a flexible and accessible way for hands-off traders to buy and sell assets. 

6. Plan for retirement

A retirement account is one type of investing account. Early retirement may even be one of your long-term financial goals. The best retirement plan for you depends on your individual situation. 

One of the easiest ways to start savings for retirement is through an employee-sponsored retirement plan like a 401(k) , 403(b) , or SEP IRA . These are tax-advantaged accounts that collect a portion of your salary. Some plans, like most 401(k)s, may offer to match an employee's contributions up to a certain percentage. 

In order to grow your account faster, find out how much your employer matches and contribute enough to reach the maximum contribution amount.  In 2023, you can contribute up to $22,500 if you're under 50 years old (people age 50 or older can add an additional $7,500), but keep in mind that you can't withdraw funds until you're 59 1/2. 

Another option is an individual retirement account (IRA), which functions similarly to a 401(k) but it is not sponsored by an employer. IRAs are also tax-advantaged accounts and are often more flexible. In 2023, you can contribute up to $6,500 if you're under 50 (up to $7,500 if you're 50 or older). You also can't withdraw until you're at least 59 1/2. 

A well-thought-out plan not only helps you meet your financial goals but will also map out an accessible course of action based on your individual circumstances. Not only can you better your understanding of your own finances, but you can also focus on reaching important steps. Plus, you're more likely to reach your goals faster. 

While it may be stressful in the beginning, having a clear insight into your income and spending can reduce future stress and financial worry. The more you understand your own financial needs, the more realistic your expectations about the future.

You may also be better prepared for emergencies, like disability or financial trouble. Routinely contributing to an emergency fund is a great way to reduce financial stress and prevent your savings from being drained if trouble arises. 

Financial planning frequently asked questions (FAQs)

Financial planning means that an individual(s) tracks cash flow, budgets expenses, saves for retirement, pays down/manages debt, and invests funds in order to reach long and short-term financial goals. It's a personalized plan based on individual values, risk tolerances, and time horizons.

An example of financial planning may look like a young couple with dual income devising a plan to buy a home in five years based on their current cash flow. In order to reach this goal, the couple establishes a reasonable budget based on necessary monthly expenses (including debt payments), consistent monthly income, and what's left over to save. They develop a plan to pay down their high-interest credit card debt first. Then they open a high-yield savings account and put savings for their down payment into this account, while also contributing to an emergency fund in case any unexpected expenses come up in the next five years.

You can start financial planning by determining your financial goals and tracking your cash flow. If you're struggling to start, you can reach out to a financial planner, financial advisor, or financial consultant for help. 

How to start financial planning

Everyone can benefit from financial planning, no matter what your current financial situation is. A plan can lay out the steps you need to take to reach your long and short-term goals. Whether it's early retirement, buying a house, savings up for a wedding or creating a college fund , a personalized financial plan can help you get there. 

You can start planning by setting goals, tracking your cash flow, budgeting, paying down debt , investing in a diversified investment portfolio, and saving for retirement.

But remember that financial plans aren't static. You'll need to consistently reevaluate your plan in order to make sure it reflects your current situation and goals. 

"While you should be constantly monitoring and adjusting your plan as your life changes, some typical triggers for an update in your financial plan may include a change in income/employment, change in marital status, birth of a child, receiving an inheritance, and much more," says Gilberti. 

If you're having trouble getting started, a certified financial advisor or financial planner can guide you through the process. You can find a financial advisor through online reviews or by talking with friends and family. 

Editorial Note: Any opinions, analyses, reviews, or recommendations expressed in this article are the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any card issuer. Read our editorial standards .

Please note: While the offers mentioned above are accurate at the time of publication, they're subject to change at any time and may have changed, or may no longer be available.

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• Post published: October 26, 2023
• Post category: Financial Planning

Table of Contents

Financial planning is a critical cornerstone of achieving long-term financial stability and success. In an ever-changing economic landscape, understanding the importance of financial planning has never been more crucial. It is the roadmap that guides individuals and businesses towards their financial goals and dreams. 

Effective financial planning allows you to make informed decisions about your money, whether it’s saving for retirement, buying a home, or starting a business. Without a well-thought-out financial plan, you risk facing unexpected financial hurdles and missing out on opportunities for growth and prosperity.   

In this article, we will delve deeper into the significance of financial planning and how it can pave the way for a secure and prosperous future.  

Building a strong financial foundation  

To embark on a journey toward financial success, the guidance of a skilled financial planner is invaluable. These professionals possess the knowledge and expertise to help you create a solid financial foundation. They work closely with you to assess your current financial situation, set achievable goals, and develop a customized plan that aligns with your aspirations. With a financial planner by your side, you can navigate the complexities of investment strategies, retirement planning, and  risk management , ensuring that your financial future remains secure and prosperous.

Goal achievement through strategic planning  

Goal planning is the compass that directs your financial journey. It involves setting clear objectives, both short-term and long-term, and devising a strategic roadmap to reach them. Whether you aspire to buy a home, fund your children’s education, or retire comfortably, goal planning empowers you to chart a course toward your dreams. It involves assessing your current financial situation, estimating the resources required, and creating a timeline for achievement. With a well-structured goal plan in place, you not only gain focus and motivation but also the confidence that your financial aspirations are within reach.  

Managing income and expenses efficiently

Efficiently managing your income and expenses is the cornerstone of financial well-being. It starts with creating a well-structured budget that outlines your income sources and categorizes your spending. By closely monitoring where your money goes, you can identify opportunities for savings and make informed spending decisions. This proactive approach helps you live within your means, save for future goals, and alleviate the stress of financial uncertainties. Effective income and expense management lays a solid foundation for financial stability and empowers you to achieve your financial aspirations.

Risk management and insurance  

In the complex landscape of personal finance, risk management plays a pivotal role. It involves identifying potential financial risks and implementing strategies to mitigate them. Insurance is a vital component of this process, protecting against unforeseen events like accidents, illness, or property damage. By carefully assessing your risk exposure and selecting the right insurance policies, you can safeguard your financial stability and peace of mind.   

Investment planning for growth  

Investment planning is the engine that drives wealth creation and growth. It involves the strategic allocation of your assets into various investment vehicles like stocks, bonds, real estate, and more. An investment planner, with their expertise, helps you navigate this intricate landscape, tailoring a portfolio that aligns with your financial goals and risk tolerance. Effective investment planning not only seeks to maximize returns but also manages risks.   

Retirement planning  

Retirement planning  is a vital aspect of financial security, ensuring that you can enjoy your golden years with peace and comfort. It involves setting aside funds during your working years and creating a roadmap for a financially secure retirement. A well-crafted retirement plan considers factors like savings, investments, pensions, and Social Security, aiming to provide a steady income stream after you stop working. 

Tax planning 

Tax planning is an essential element of sound financial management. It involves optimizing your financial activities to minimize your tax liability legally. Effective tax planning can result in significant savings, allowing you to keep more of your hard-earned money. By understanding the intricacies of  tax planning , you can make informed financial decisions and keep more of your wealth for future goals and financial security.  

Adapting to life changes   

Life is full of twists and turns, and your financial plan should be flexible enough to adapt to these changes. Whether it’s marriage, starting a family, a career shift, or unexpected challenges, adapting to life changes is crucial for maintaining financial stability. From updating your budget to revising your investment strategy, we’ll explore how to navigate life’s transitions while keeping your financial goals on track.  

Also Read:  Importance Of Financial Independence For Women

Conclusion  

In conclusion, the significance of financial planning cannot be overstated. It is the compass that guides you toward financial stability and success, helping you achieve your goals and dreams. By diligently managing income, expenses, investments, and risks, you can pave the way for a secure and prosperous future.

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How to Write a Financial Planning Essay

Whether you’re running a company or managing your personal finances , organizing finances can be daunting. Some people are able to make it week to week and month to month without doing much financial organization . They’re seemingly able to just work with what they have and not worry too much about staying organized. This is a rare skill.

If you have financial goals that you wish to achieve, then writing a financial planning essay is absolutely essential. A good financial plan has to go beyond merely jotting down what money you have coming in and what you have to spend it on. If you want to make any real progress in getting ahead, then you need a plan that goes in depth. You need a financial planning essay. Here you’ll learn everything you need about how to write a financial planning essay and what one can do for your financial future.

Why Write an Essay?

If you have money, you likely already have some idea of how you need or want to spend it. So, why would you want to write an essay, something most people don’t do past college? The answer is simple: clarity of short-term and long-term financial goals .

When writing a financial planning essay, you’re putting down in detail what your financial plan is. You’re also defining the manner in which you will carry the plan out. It’s one thing to sit down and list your expenses and your projected income, but it’s easy for spending to get out of control without a more meticulous plan in place.

Writing in essay form helps you keep track of how much money you have coming in. You also keep track of where it came from. By sitting down and carefully describing where your money is coming from and how, when, and where you are going to spend you are being explicitly clear in your goals.

What Information Goes in a Financial Planning Essay?

Financial planning is a process that requires you to know how much money you have coming, what expenses you have, and when that money must be paid. It also enables you to factor in money and assets that are already available to you.

Weighing Options

If there is an expense your current budget does not cover, then you need to address it in the essay. Maybe you have goods around your home that you could pawn? Can you take out a loan? Maybe you can borrow money from a friend? Any means by which you can bring in money should be listed in your essay.

If you include borrowing money in your financial essay you need to also include how you plan to pay it back. If you take a loan that requires you to pay in installments, you need to feature those installments as part of the essay.

When creating a financial planning essay there is no real “right” way to go about organizing the content. However, as with any essay, if you want it to make sense it must have some form of structure. Here is just one potential financial planning essay structure that you can utilize:

• Money goals – In this paragraph, you should state explicitly what your financial goals are and in what time frame you intend to meet them.
• Current funds and assets – This is where you list your current amounts of money or assets that can be leveraged to get money.
• Income – This is where you state your income and the intervals at which you receive it.
• Outgoing expenses – This is a detailed account of what bills and expenses you need to pay in the given time frame that you have chosen. You must also outline how exactly you will pay each of these expenses.
• Alternative means of income – This is where you detail any alternative means of bringing in money. These are sources you perhaps had not yet considered in your goal-making. Perhaps you have decided to take on a side hustle? Maybe you are thinking of donating plasma for money? Maybe you are considering having a garage/yard sale? Perhaps a family member owes you some money? Whatever alternative money you could have could make a huge difference in helping you achieve your financial goals in a more timely manner.
• Goal implementation – This paragraph is arguably the most important one. Here you break down what your goals are when you wish to accomplish them, and how you intend to do it. Putting your goals and your plans for carrying them out is critical because you are giving yourself a perfect guide for how to achieve your financial goals.

Holding Yourself Accountable

The biggest reason for writing a financial planning essay is to hold yourself accountable. When your funding comes in, the essay is your point of reference to keep on track. Think of it as a map that shows you exactly where your money needs to go.

On the other hand, the essay also serves as a means to cushion the blow of any potential disappointment. Life happens, and sometimes when life happens you have to spend money. When this happens you can look to your essay to remember. Remember that the circumstances that set you back were unforeseen.

At the end of the day, all you can do is stick to your financial plan as best you can. It is okay to be a little tough on yourself when you misspend, but you should never beat yourself up over it either. Work your plan to the fullest of your ability. Only then you will be able to meet your goals.

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Four Things That Impact the Financial Plans of Every One of Us

You can control some of these factors (how much you save), but others you can’t (how long you live), so there’s good news and bad news here.

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After over 20 years of being a financial planner, you certainly pick up a few things. You realize every plan is different, and every individual is unique. I’ve learned people’s tendencies and what makes different people tick. I’ve also had the pleasure of seeing countless people achieve their life goals, which is all extremely satisfying stuff.

However, for all the differences we have, I find equally interesting the fact that the key tenets of what make our financial plans work are relatively similar, and the list is fairly short. This naturally bodes the question of what are the key drivers in making our financial plan work?

The good news is, again, there are only a handful of truly defining data points that matter. The bad news? There are only a handful of defining data points that matter.

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Now, keep in mind we are a firm that truly believes in financial modeling as a core tenet to understanding one’s finances.

OK, so what truly impacts your financial plan?

1. How long you live.

I often make a terrible joke with people, saying, “If you plan to die a day after you retire, your plan is easy.” But there is some truth in those words. If we are defining successful retiring as not running out of money, well, then, naturally how long we need to rely on our life savings matters. If you do indeed live for one day or one year after you retire, the plan is easy.

That said, more and more people are living longer with modern medicine, and this has a major impact on one’s finances.

2. How much you spend.

The next piece of data that is likely the most impactful to your plan is expenditures. Three identical individuals with identical assets but with drastically different spending rates will have various degrees of success in retirement.

When people ask me how much money they need to retire , the answer always comes from understanding what they need to live on in retirement. It goes without saying that an individual spending $100,000 a year vs one spending $300,000 a year have different needs to succeed.

The good news is this is one of the easiest things that you can control. The bad news is it takes actual work.

3. How much you save.

Well, shocker alert here: Your ability, and willingness, to save is hugely impactful on the probability of reaching your goals. Our clients who prioritize savings and investing simply get there sooner and better. Not only that, but they also arrive at their destination with more options than those who don’t prioritize savings . It truly is a marathon and a sprint all bundled up together.

Again, the good news is you can easily control this and simply make small changes. Additionally, the sooner you start, the more likely you are to achieve your goals.

4. Everything else.

I’m going to cover a lot of ground in this category. Although, when you die, how much you spend and how much you save are some of the largest contributors, there are certainly a handful of others that move the needle. Such as how much you earn. Naturally, the more you earn, the more you can save, although that doesn’t mean you always do save.

Next up, how your investments are structured. If you are more risky vs risk adverse, that will directly impact your financial goals. Also, in this line of thinking is everyone’s favorite word these days — inflation . The more goods increase in price, the more you’ll need in present value terms. A mixed bag here of good and bad news. The good news is some of this you can directly influence. The bad news is, try as we might, things like inflation are completely out of our control.

Those who fail to plan, plan to fail

I guess the key things I would glean from this blog are a few-fold. One is that there aren’t a million large things that impact our plans. Two is that many of these factors you can directly control at various levels. Three, you sadly can’t control all these factors, but you can control enough of them. And finally, four, the more you plan and model, the more you can see where you stand and what moves your needle the most.

We’re always here to help any way we can, and know we aim to have you live a wealthy, healthy and happy life.

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Diversified, LLC does not provide tax advice and should not be relied upon for purposes of filing taxes, estimating tax liabilities or avoiding any tax or penalty imposed by law. The information provided by Diversified, LLC should not be a substitute for consulting a qualified tax advisor, accountant, or other professional concerning the application of tax law or an individual tax situation.

Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments. Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

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In March 2010, Andrew Rosen joined Diversified , bringing with him nine years of financial industry experience.  As a financial planner, Andrew forges lifelong relationships with clients, coaching them through all stages of life. He has obtained his Series 6, 7 and 63, along with property/casualty and health/life insurance licenses. 

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• Financial Planning

Financial Planning is a vital part of Financial Management. In fact, planning is the first function of management. Before embarking on any venture, the company must have a plan. Let’s understand in detail what Financial Planning is.

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Before initiating a new business , the organization puts an immense focus on the topic of Financial Planning. Financial planning is the plan needed for estimating the fund requirements of a business and determining the sources for the same. It essentially includes generating a financial blueprint for company’s future activities. It is typically done for 3-5 years-broad in scope and generally includes long-term investment, growth and financing decisions.

Browse more Topics under Financial Management

• Meaning of Business Finance
• Financial Management and Objectives of Financial Management
• Financing Decision
• Capital Structure

Objectives of Financial Planning

• Ensuring availability of funds : Financial planning majorly excels in the area of generating funds as well as making them available whenever they are required. This also includes estimation of the funds required for different purposes, which are, long-term assets and working capital requirements.
• Estimating the time and source of funds : Time is a game-changing factor in any business venture. Delivering the funds at the right time at the right place is very much crucial. It is as vital as the generation of the amount itself. While time is an important factor, the sources of these funds are necessary as well.
• Generating capital structure : The capital structure is the composition of the capital of a company , that is, the kind and proportion of capital required in the business. This includes planning of debt-equity ratio both short-term and long-term.
• Avoiding unnecessary funds: It is an important objective of the company to make sure that the firm does not raise unnecessary resources . Shortage of funds and the firm cannot meet its payment obligations. Whereas with a surplus of funds, the firm does not earn returns but adds to costs.

(Source: indiainfoline)

Process of Financial Planning

• Preparation of sales conjecture.
• Decide the number of funds – fixed and working capital.
• Conclude the expected benefits and profile ts to decide the number of funds that can be provided through internal sources.
• This causes us to evaluate the requirement from external sources.
• Recognize the conceivable sources and set up the money spending plans consolidating these variables.

Importance of Financial Planning

Financial Planning is the procedure of confining company’s targets, policies , techniques, projects and budget plans with respect to the financial activities lasting for a longer duration. This guarantees viable and satisfactory financial investment policies. The importance is as follows-

• Guarantees sufficient funds.
• Planning helps in guaranteeing a harmony between outgoing and incoming of assets with the goal that stability is kept up.
• Guarantees providers of funds to effortlessly put resources into organizations which provokes financial planning.
• Financial Planning supports development and expansion programmes which support in the long-run sustenance of the organization.
• Diminishes vulnerabilities with respect to changing business sector patterns which can be confronted effortlessly through enough funds.
• Financial Planning helps in diminishing the vulnerabilities which can be a deterrent to the development of the organization. This aids in guaranteeing security and benefits of the organization.

Solved Question for You

Question: Choose the first step of the process of Financial Planning

• evaluate the requirement from external sources
• recognize the conceivable sources
• decide the number of funds that can be provided through internal sources
• preparation of sales conjecture

Answer. d. Preparation of sales conjecture is the first step in this process.

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Distinguish between financing decision and investing decision

Make a detail discussion how firms deal with their daily financial decisions?

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If you are the finance manager, how are you going do an optimum utilization of cash to make the business profitable?

What is the relationship between the three types of decisions?

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Financial Planning: Analysis Essay

Introduction.

Organizations undertake financial planning in order to ensure that they utilize resources effectively to achieve their intended objectives. Financial planning mainly entails strategically devising means through which the organization can source funds and use them efficiently to achieve growth and development.

However, a plan on how to allocate the funds is also critical in ensuring that the intended growth and development are attained. This is the essence of budgeting. This paper carries out an elaborate analysis of the financial planning process, determining the difference between budgets and financial plans and explaining the role of strategic management.

The distinctions between a budget and a financial plan

While budgets often deal with data relating to both the specific budget year as well as the previous year, financial plans cover at least two past years (Mittal, 2010). Additionally, financial plans project the future expenditure of more than two years derived from the strategic documents of the organization. These strategic documents vary in their scope and roles and may include documents on staffing patterns, history of enrolment, and capital needs among many others.

The processes of these two documents also vary. A financial plan often undertakes a financial evaluation seeking to determine loopholes through which funds go into waste, rather than performing their intended tasks. Financial plans thus lead to the renewal of programs that produce positive results.

Ineffective programs are discovered through the help of such plans and are dropped off to pave the way for the valuable ones only. On the contrary, budgeting entails a routine process that undertakes annual expenditure review. Budgeting officers rely on specific directions to determine the spending limits before they can come up with new programs for their enterprises (Mittal, 2010).

The main purpose of budgets is to achieve compliance. This differs from a typical financial plan purpose that aims at achieving fiscal stewardship. Budgets compare revenues with expenditures with a view of matching up the two. This is opposed to the financial planning purpose that makes a projection of the long term sources of funding and how the funds can be used.

As Barrow (2011) asserts, the program effectiveness is also evaluated using the financial plan, while assisting the decision makers to strictly maintain the resources towards attaining the vision of an organization.

The role of strategic management

Strategic management involves making decisions and performing acts to determine how a firm performs (Cole, 2003). Strategic management takes care of both known and unseen events in the future. The main goal of strategic management is to achieve sustainable competitive advantage for the organization ahead of its market competitors.

Organizational strategists rely on strategic management to determine specific objectives before proceeding to attain them. It becomes easier to plan how to utilize the available resources in order to steer the organization towards realizing the goals once the managers have identified the strategic goal. The continuous process provides an avenue for organizational managers to evaluate as well as control the industry and business they are involved in.

This includes evaluating competitors’ potential and establishing goals and strategies to outdo the competition. Managers also need to regularly reevaluate strategies to establish their effectiveness and, where possible, change them to suit the external condition (Cole, 2003).

How budgeting plays an integral role in the financial planning and the strategic management process

Budgets reflect the management’s quantifiable manifestation about the goals and plans of the company over the future period. The organizational budget thus helps in allocating the resources of the organization in order to enable it to achieve the desired goals and objectives. Budgeting plays the critical role of allocating the limited resources in order to sustain different organizational goals and objectives since resources are often scarce (Fabozzi & Drake, 2009).

The budgeting process provides management with a cue to determine and undertake a review of the implications of an organization’s cash flow. This also helps in other important roles, such as conducting inventory planning and drawing up of the balance sheet (Fabozzi, & Drake, 2009). It is not possible for any organization to assess its financial position or determine the respective needs of borrowing without conducting a budget process.

Budgeting supplements the strategic planning of an organization. Strategy development is important in enabling an organization to build its own competitive edge over its rivals in the market. As the managers come up with the strategic plan, budgeting enhances their efforts by specifically allocating resources to the plans. Thus, allocation of resources eventually helps the management to achieve its intended target.

With market conditions constantly fluctuating, it is difficult for an organization to cope with the situation unless it has a budget in place. Thus, financial budgets enable the organization to speed up the goal attainment process under uncertain market conditions. Through budgeting, organizations identify the risks lying in wait and effectively adopt measures to minimize them (Fabozzi & Drake, 2009).

Financial plans differ from budgets in many aspects, including their respective time duration, process as well as purpose. Budgets are short lived, and often, their focus lies within a range of two years. Financial plans, on the other hand, focus on a long term period extending up to five years.

Budgets are also tactical, as opposed to the strategic nature of financial plans, and their main purpose is compliance contrary to the fiscal stewardship of financial plans. As a strategy, financial plans seek to identify sources of funds and determine avenues through which such funds can be utilized effectively to the benefit of the organization.

Barrow, C. (2011). Practical financial management: a guide to budgets, balance sheets and business finance . London: Kogan Page

Cole, G. A. (2003). Strategic management . Belmont, CA: Cengage Learning.

Fabozzi, F. J. & Drake, P. (2009). Finance: capital markets, financial management, and investment management . Hoboken, NJ: Wiley

Mittal, R. K. (2010). Management accounting and financial management . New Delhi: V.K. Enterprises

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IvyPanda. (2019, June 12). Financial Planning: Analysis. https://ivypanda.com/essays/financial-planning-analysis/

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Importance of Financial Planning in Your Life

Financial Planning gives you clarity in life, provides direction & meaning to your financial decisions . The Importance of Financial Planning can be understood from the statement of one of our clients “I am just concentrating on the financials plan you have advised me. I am relaxed. I have no anxieties and am having a peaceful sleep . I am confident that we will be able to maintain our current standard of living after retirement also.”

What are the Benefits of Financial Planning in Your Life?  – Relaxed life, No Anxiety, peaceful sleep. I think this answer is totally different from what most clients expect initially.

I wish I had a house by the beach.

I want to get my children educated abroad.

I desire to be rich

These statements are just wishful thinking if you do not plan your finances to achieve them. It is not only knowing how much will it cost to fulfill these wishes. There are many other things involved – how to save money for it, taxation aspects, how much to earn, save and spend so that these goals can be reached. Basically, you have to plan for your goals else it is difficult to achieve these dreams or goals.

Financial Planning is the process of determining ways to earn, save and spend money and the amount you need to earn, invest and spend. By planning your finances, you manage your money such that you reach your life goals.

There is no single definition of Financial Planning but important is – the process should help you achieve your goals & bring peace of mind.

Must Read – What is Financial Planning?

Importance of Financial Planning

Financial Planning plays an important role in different aspects –

• It provides direction to your goals or dreams. Financial planning helps you understand your goals better in terms of why you need to achieve these goals and how they impact other aspects of your life and finances.
• Planning encourages you to manage inflation. You are aware of the price of various things and activities. You plan your budget in a better manner.
• Financial planning makes you disciplined towards money. You do not spend unnecessarily. You keep a check on your savings and spending.
• By planning your finances, you plan for the future. You are able to gain visibility into your finances in the future. You have a fair idea of how much money would you have, say ten years down the line. You would be aware of the returns your investments should earn to achieve your goals.
• What about peace of mind –  But why do people avoid Financial Planning – strange reasons

Check Video – 4 Pillars of Financials Planning

Must-Read- Why It’s Simpler to Succeed With Financial Planning Than You Might Think

Importance of Financial Planning in every aspect of finance –

Below we have discussed the importance of financial planning and why do we need planning . It will give you clear thoughts idea, Read below.

1. Income – When you have a financial plan , you manage your income better. You are aware of how much you earn from salary, interest earned, dividends, etc. This will help you to understand how much you are earning and if it is enough to earn to achieve your objectives. (if you have a choice or if you don’t have a choice at all)

2. Expenses – We spend money on basic needs, wants and splurge on luxuries. If we plan our finances, we will keep an eye on our expenses. Even if we go overboard in one month, we will know how much to cut back in the following months to stay within budget. Spending changes with changes in lifestyle and stage of life. This will help us determine income requirements and we can make changes in our earning capability accordingly.

Must Read – 7 Compelling Reasons To Hire A Financial Planner In India

3. Savings – You record your income and expenses in the plan. Therefore you know your savings. Planning gives you an idea of how much money you need to achieve your objectives. You make a budget and therefore can assess whether you are within budget or overspending. This will help you understand your savings rate and how much you need to save to reach your goals.

4. Investment – A plan will help to choose the right investments as per your income capacity, risk profile, and goals. The plan will have an investment portfolio and asset allocation details. This can help you to have a balanced portfolio at all times.

5. Taxation – Thinking about taxes in the last week of March is not a prudent idea. With a financial plan, you can assess your tax outgo at the beginning of the financial year. You can plan your finances such that you pay the least amount of tax in a legal manner.

6. Retirement – We all want a carefree, relaxed retirement. It is possible only if you plan your finances such that your lifestyle is taken care of. You should have cash reserves to take care of medical expenses and other emergencies. A proper plan will have the retirement goals listed and the income, expenses, and investment details. This will help you determine steps to achieve your goals.

Check – Financial Planner in India

7. Estate Planning – Estate planning refers to the provisions made regarding your wealth and its distribution smoothly after your death. The amount of wealth is not important here but the details regarding how assets and liabilities are to be taken care of are important. The financial plan will have a broad outline of what is to be done so that those taking care of your finances know what steps are required to be taken to manage your estate.

8. Ups and downs of Financial Status – There are many changes in our life. You get married, you can lose your job, you win a lottery or a loved one becomes critically ill. You make some money decisions that affect your standard of living. Such changes can lead to positive or negative changes in your financial status. The importance  of personal Financial planning anticipates financial requirements in different conditions and ensures smooth financial flow at all times.

Check – Financial Planning Infographics

Here is a broad outline of what is to be done to create a financial plan –

Once you understand the importance of personal Financial Planning – you can start taking the steps…

One of the most shared articles on TFL – Financial Planning Thumb Rules

• Set up the financial goals either by yourself or with the guidance of a financial planner. How to set SMART Goals?
• Collate all relevant data required to set up a plan. Data can include financial objectives, annual income, spending estimates, loans taken, the expected rate of return on different assets, etc.
• Analyse the data collected to find out your true financial position. Try to find out appropriate investment avenues.
• Develop the financial plan taking into account the goals to achieve and the current means. The plan will help you draft realistic goals and how to achieve them.
• Put the plan in action . Check the tasks to be done and start executing the steps. For example, the plan, depending on the financial situation and investment profile shows different options. For example. it might be considered that you can invest some amount in an equity mutual fund or you can’t invest a single additional penny in equities based on your risk profile.
• Monitor and review the plan regularly . You can set up a meeting with your professional planner if any who can guide you to make prudent decisions regarding your money. If required, the plan should be tweaked to be relevant to your current financial situation.

Of course, it is not possible to predict the future. But a sound financial plan will help you and your loved ones to tide over the good and bad.

Please share your view on the importance of Financial Planning & if you have any questions regarding your financial plan feel free to ask.

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20 comments.

Hi .. I like this article . It is very simplementation and easy to understand.

However thr only thing this articleis missing are the details about any financial planner who can help with a portfolio.

Regards Sonia

good one , thanks

A thorough and well-written article. Yes, when we make a financial plan first we must aim for maintaining the present lifestyle first. And then build on this foundation.

I really enjoyed reading through the article.

Please keep up the good effort.

Thanks Anand.

Good one … Thanks you

Really full of insights. Loved reading your articles

Thanks Satyan:)

Great Post!!

Hi, Thanks for sharing valuable information.

Thanks for sharing such an informative blog

You made a good point about how financial planning is important in order to have a carefree retirement, backed up by emergency funds in case needed. I’ve been working for 10 years and I already feel that I am not getting any younger. I should definitely start looking into getting professional financial counsel to see what my options are.

it is more useful and great in thoughts

Thanks Alisbha 🙂

This is a piece of very useful knowledge about the importance of financial planning in life and everything related to financial planning are properly explained.

Thank you for sharing this insight. Really appreciated your time and effort.!!!

Keep up the Good Work..!!!!

Very nicely explained. it is a very important points for financial planning. very easily understand! keep sharing like this type of article.!

My friend and I were talking about our future and what we would like to do once we retired. It would be a great idea to start thinking about getting advice from a financial planner so that we can enjoy our retirement.

Great Post. Thanks for sharing information about financial planning. It helps me a lot. Keep sharing these types of informative posts. Thanks

Comments are closed.

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The Importance of Financial Planning for your Businesses 

When you’re starting out and putting in the hours to turn that business dream into a functioning reality, it can be difficult to think of next week – never mind next year. However, it always pays to plan ahead, especially when it comes to the financial future of your business.

Business Financial Planning:

Financial planning for your business helps you to forecast future financial results and decide how best to use your company’s current financial resources in order to realise both your short-term and long-term plans. Because planning involves looking well into the future, it is a highly creative thinking process as well as an analytical one, and you might need to call in the experts to help you juggle both these aspects of your financial roadmap.

How can financial planning help me achieve my company goals?

Having a strong financial plan for your business is probably the most important single thing that you can do to help yourself succeed.  It’s your roadmap, your guideline, a reminder of what your goals are–what you are trying to achieve in the short term and the long term. It is so important that possible investors, bankers, and creditors won’t even set up a meeting with you if you don’t have a financial plan in place. We cannot state this clearly enough – get your business’s financial function set up effectively from the start, and the rest will follow. 

Here are 5 benefits of financial planning for your business:

Financial planning can help you:

• Manage your cash flow properly: Good financial planning allows you to set clear expectations regarding your cash flow so that you know where you can spend and where you need to cut back. This is especially important after the initial startup expenditures.
• Allocate your budget: Financial planning for businesses makes for clever budget allocation and allows all players within your company to understand where and how money will be spent, ensuring less friction. 
• Set realistic goals: If you don’t know how much you have to work with, you can’t set realistic financial goals that work within your budget. Your vision might be lofty, but it pays to be realistic.
• Mitigate your risk: A good financial plan should prepare for unexpected expenses, as well as times of lower income. That way you can ride out the bad times, but keep your doors open.
• Plan a roadmap for the future: Financial planning helps you clarify your company goals and communicate them to your employees and other stakeholders. This makes it easier for the business owners and top management to make more good decisions when planning to scale.

Most people have some idea of what they would like to achieve financially, but they don’t always know how to go about setting realistic goals. Companies that put in the time and effort to work out an effective and strategic financial plan , will be able to allocate their time and resources effectively, allowing them to expand while ensuring good cash flow and healthy accounts.

Does my business need a financial plan?

In short – yes. If money is the lifeblood of your business, then you cannot afford NOT to have a sound financial plan in place. A good financial plan that you refer back to, will allow you to spot anomalies and positive or negative trends in your finances so that you can take the necessary corrective action. This means that you can make your money work for you – spending when and where it’s needed for growth, and cutting back on those outgoings that are becoming a financial black hole. 

We have found that business owners and entrepreneurs are often so involved in the day-to-day running of their businesses, that they don’t have the time and energy to think of long-term financial planning and strategy. This is where we recommend a financial consultant or CFO with the expertise to see what you might miss.  Many entrepreneurs are making use of the services of a virtual CFO instead of hiring full-time, as this allows them access to expertise without the cost of a permanent hire.

What should be included in a business financial plan?

All business financial plans , whether you’re just starting a business or building an expansion plan, should include at least the following:

• Revenue or income – what money is actually coming into your business.
• Your basic fixed operating costs such as rent and utilities.
• General monthly expenses such as marketing etc.
• Costing of your goods or services – take the time to note every cent and every minute that you put into producing your product or service.
• Total profit or loss – the formula for this is income minus cost of goods or services.
• Actual operating income (total profit minus expenses).

After you have these basics down and feel that you have at least an overview of the financial health of your business, it is important to remember that ‘big-picture’ higher-order financial planning and strategizing  are also necessary for the long-term viability of your business. Finance is complex and the finance function is often one of the last frontiers to get fortified by the leadership team. It is also one that becomes increasingly more important as you head towards further expansion, possible fundraises and potential acquisitions. Getting the numbers right is critical. So is developing the right strategy based on analysis, forecasts , and smart financial management . This is where you need the advice of an expert CFO or the assistance of a virtual ‘CFO-as service’ company like Outsourced CFO.

At Outsourced CFO we can assist with getting your financial planning off to a solid start,  in order to help you with building long-term profitability for your business. Reach out to us and let’s get your business ready for growth.

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Financial Analysis: Definition, Importance, Types, and Examples

What Is Financial Analysis?

Financial analysis is the process of evaluating businesses, projects, budgets, and other finance-related transactions to determine their performance and suitability. Typically, financial analysis is used to analyze whether an entity is stable, solvent , liquid , or profitable enough to warrant a monetary investment.

Key Takeaways

• If conducted internally, financial analysis can help fund managers make future business decisions or review historical trends for past successes.
• If conducted externally, financial analysis can help investors choose the best possible investment opportunities.
• Fundamental analysis and technical analysis are the two main types of financial analysis.
• Fundamental analysis uses ratios and financial statement data to determine the intrinsic value of a security.
• Technical analysis assumes a security's value is already determined by its price, and it focuses instead on trends in value over time.

Investopedia / Nez Riaz

Understanding Financial Analysis

Financial analysis is used to evaluate economic trends, set financial policy, build long-term plans for business activity, and identify projects or companies for investment. This is done through the synthesis of financial numbers and data. A financial analyst will thoroughly examine a company's financial statements —the income statement , balance sheet , and cash flow statement . Financial analysis can be conducted in both corporate finance and investment finance settings.

One of the most common ways to analyze financial data is to calculate ratios from the data in the financial statements to compare against those of other companies or against the company's own historical performance.

For example, return on assets (ROA) is a common ratio used to determine how efficient a company is at using its assets and as a measure of profitability. This ratio could be calculated for several companies in the same industry and compared to one another as part of a larger analysis.

There is no single best financial analytic ratio or calculation. Most often, analysts use a combination of data to arrive at their conclusion.

Corporate Financial Analysis

In corporate finance, the analysis is conducted internally by the accounting department and shared with management in order to improve business decision making. This type of internal analysis may include ratios such as net present value (NPV) and internal rate of return (IRR) to find projects worth executing.

Many companies extend credit to their customers. As a result, the cash receipt from sales may be delayed for a period of time. For companies with large receivable balances, it is useful to track days sales outstanding (DSO), which helps the company identify the length of time it takes to turn a credit sale into cash. The average collection period is an important aspect of a company's overall cash conversion cycle .

A key area of corporate financial analysis involves extrapolating a company's past performance, such as net earnings or profit margin , into an estimate of the company's future performance. This type of historical trend analysis is beneficial to identify seasonal trends.

For example, retailers may see a drastic upswing in sales in the few months leading up to Christmas. This allows the business to forecast budgets and make decisions, such as necessary minimum inventory levels, based on past trends.

Investment Financial Analysis

In investment finance, an analyst external to the company conducts an analysis for investment purposes. Analysts can either conduct a top-down or bottom-up investment approach. A top-down approach first looks for macroeconomic opportunities, such as high-performing sectors, and then drills down to find the best companies within that sector. From this point, they further analyze the stocks of specific companies to choose potentially successful ones as investments by looking last at a particular company's  fundamentals .

A bottom-up approach, on the other hand, looks at a specific company and conducts a similar ratio analysis to the ones used in corporate financial analysis, looking at past performance and expected future performance as investment indicators. Bottom-up investing forces investors to consider  microeconomic  factors first and foremost. These factors include a company's overall financial health, analysis of financial statements, the products and services offered, supply and demand, and other individual indicators of corporate performance over time.

Financial analysis is only useful as a comparative tool. Calculating a single instance of data is usually worthless; comparing that data against prior periods, other general ledger accounts, or competitor financial information yields useful information.

Types of Financial Analysis

There are two types of financial analysis: fundamental analysis and technical analysis .

Fundamental Analysis

Fundamental analysis uses ratios gathered from data within the financial statements, such as a company's earnings per share (EPS), in order to determine the business's value. Using ratio analysis in addition to a thorough review of economic and financial situations surrounding the company, the analyst is able to arrive at an intrinsic value for the security. The end goal is to arrive at a number that an investor can compare with a security's current price in order to see whether the security is undervalued or overvalued.

Technical Analysis

Technical analysis uses statistical trends gathered from trading activity, such as moving averages (MA). Essentially, technical analysis assumes that a security’s price already reflects all publicly available information and instead focuses on the  statistical analysis of price movements . Technical analysis attempts to understand the market sentiment behind price trends by looking for patterns and trends rather than analyzing a security’s fundamental attributes.

Horizontal vs. Vertical Analysis

When reviewing a company's financial statements, two common types of financial analysis are horizontal analysis and vertical analysis . Both use the same set of data, though each analytical approach is different.

Horizontal analysis entails selecting several years of comparable financial data. One year is selected as the baseline, often the oldest. Then, each account for each subsequent year is compared to this baseline, creating a percentage that easily identifies which accounts are growing (hopefully revenue) and which accounts are shrinking (hopefully expenses).

Vertical analysis entails choosing a specific line item benchmark, then seeing how every other component on a financial statement compares to that benchmark. Most often, net sales is used as the benchmark. A company would then compare cost of goods sold, gross profit, operating profit, or net income as a percentage to this benchmark. Companies can then track how the percent changes over time.

Examples of Financial Analysis

In the nine-month period ending Sept. 30, 2022, Amazon.com reported a net loss of $3 billion. This was a substantial decline from one year ago where the company reported net income of over $19 billion.

Financial analysis shows some interesting facets of the company's earnings per share (shown above. On one hand, the company's EPS through the first three quarters was -$0.29; compared to the prior year, Amazon earned $1.88 per share. This dramatic difference was not present looking only at the third quarter of 2022 compared to 2021. Though EPS did decline from one year to the next, the company's EPS for each third quarter was comparable ($0.31 per share vs. $0.28 per share).

Analysts can also use the information above to perform corporate financial analysis. For example, consider Amazon's operating profit margins below.

• 2022: $9,511 / $364,779 = 2.6%
• 2021: $21,419 / $332,410 = 6.4%

From Q3 2021 to Q3 2022, the company experienced a decline in operating margin, allowing for financial analysis to reveal that the company simply earns less operating income for every dollar of sales.

Why Is Financial Analysis Useful?

The financial analysis aims to analyze whether an entity is stable , liquid, solvent, or profitable enough to warrant a monetary investment. It is used to evaluate economic trends, set financial policies, build long-term plans for business activity, and identify projects or companies for investment.

How Is Financial Analysis Done?

Financial analysis can be conducted in both corporate finance and investment finance settings. A financial analyst will thoroughly examine a company's financial statements—the income statement, balance sheet, and cash flow statement.

One of the most common ways to analyze financial data is to calculate ratios from the data in the financial statements to compare against those of other companies or against the company's own historical performance. A key area of corporate financial analysis involves extrapolating a company's past performance, such as net earnings or profit margin, into an estimate of the company's future performance.

What Techniques Are Used in Conducting Financial Analysis?

Analysts can use vertical analysis to compare each component of a financial statement as a percentage of a baseline (such as each component as a percentage of total sales). Alternatively, analysts can perform horizontal analysis by comparing one baseline year's financial results to other years.

Many financial analysis techniques involve analyzing growth rates including regression analysis, year-over-year growth, top-down analysis such as market share percentage, or bottom-up analysis such as revenue driver analysis .

Last, financial analysis often entails the use of financial metrics and ratios. These techniques include quotients relating to the liquidity, solvency, profitability, or efficiency (turnover of resources) of a company.

What Is Fundamental Analysis?

Fundamental analysis uses ratios gathered from data within the financial statements, such as a company's earnings per share (EPS), in order to determine the business's value. Using ratio analysis in addition to a thorough review of economic and financial situations surrounding the company, the analyst is able to arrive at an intrinsic value for the security. The end goal is to arrive at a number that an investor can compare with a security's current price in order to see whether the security is undervalued or overvalued.

What Is Technical Analysis?

Technical analysis uses statistical trends gathered from market activity, such as moving averages (MA). Essentially, technical analysis assumes that a security’s price already reflects all publicly available information and instead focuses on the statistical analysis of price movements. Technical analysis attempts to understand the market sentiment behind price trends by looking for patterns and trends rather than analyzing a security’s fundamental attributes.

The Bottom Line

Financial analysis is a cornerstone of making smarter, more strategic decisions based on the underlying financial data of a company. Whether corporate, investment, or technical analysis, analysts use data to explore trends, understand growth, seek areas of risk, and support decision-making. Financial analysis may include investigating financial statement changes, calculating financial ratios, or exploring operating variances.

Amazon. " Amazon.com Announces Third Quarter Results ."

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What is a budget surplus? What time does the federal budget speech start? Where can I watch it?

The federal government is releasing its budget tonight. 

And while this will inevitably involve a lot of political talk, it will also either directly or indirectly affect your finances. 

Here's what to expect and what it could mean for you. 

Not sure what the budget is all about? Tap the link below for a quick rundown, otherwise, just scroll past the link.

What is the federal budget?

What time is the federal budget speech.

Treasurer Jim Chalmers's speech is broadcast live from Parliament House in Canberra at:

• 7:30pm AEST: ACT, New South Wales, Queensland, Tasmania and Victoria 
• 7pm ACST : Northern Territory and South Australia
• 5:30pm AWST: Western Australia 

Where can I watch the federal budget speech?

It'll be broadcast on free-to-air television on ABC TV  as well as on the  ABC News Channel . 

You can also stream it on ABC iview .

And you can watch the ABC News live stream via the ABC News website by clicking "watch live" at the top of the page. 

We'll also be blogging the whole thing live on the ABC News website , which will have a live stream of the speech at the top of the article.  

Where can I read the budget papers?

On the federal government's 2024-25 budget website . 

There's only a countdown clock on there at the moment, but we're expecting it to be updated this evening.  

What's in this year's budget?

Mr Chalmers has used words such as "sensible" and "responsible" to describe the new budget , saying there are no "slash and burn" cuts but there is also no spending "free-for-all".

Here are a few things we know about the budget already:

• Student debt changes: The federal government wants to change how tertiary education loans are indexed , proposing a backdated scheme that would reduce the amount debts increased by and see some students get refunds from what they paid last year
• Short-term cost-of-living relief: Mr Chalmers says some cost-of-living relief is coming but he hasn't gone into detail about it yet. He says it "won't be identical to what we've seen in the past but it will be substantial"
• Changes to the tax brackets:  Dubbed the stage three tax cuts, they are something we've known about for months but  won't come into effect until July . Basically, Australia's tax brackets will change slightly, as will tax rates , benefiting both lower and higher-income earners

And expect to hear a lot about a budget surplus — something any government likes to make a big song and dance about. 

What is a budget surplus?

A budget surplus means  the government makes more money than it has spent . 

Specifically, we're going to be hearing about the government delivering a $9.3 billion surplus for the current financial year.  

In very simple terms, it's the federal government's plan for how it'll collect and spend money in the coming financial year.

And this plan will impact your financial situation in one way or another, so it's quite important. 

The government details this plan in a set of documents called the budget papers, which are hundreds of pages long and will be up for public viewing tonight. 

Before the papers are officially published, the treasurer – a position currently held by Jim Chalmers – makes a speech in parliament summarising the plan. 

It's a long speech, typically taking about half an hour. 

And, generally speaking, these speeches talk up the positive points the government of the day wants to promote and gloss over the negatives. 

That's why we have a team of journalists who will be combing through the nitty-gritty details of the budget papers to suss out the real-world impacts of these plans. 

How does the federal budget impact me?

The budget shapes how our economy functions so its ripple effects have an impact on all of us whether you're a taxpayer or not. 

But specific measures will impact certain groups of people more than others.

A good way to get a quick glimpse of these impacts is by reading what we call our winners and losers list, which sums up which groups will benefit the most from the new plan. We'll publish this later this evening. 

When is the new financial year?

That's about seven weeks away. 

When is tax time?

Not for another seven weeks. 

Technically, you can submit your tax return on July 1 , but you have more than 17 weeks to do it. 

When are tax returns due?

October 31 . 

But that's only if you're doing it yourself. 

If you're going through a tax agent, you have to book you appointment before October 31 — but that doesn't mean your appointment has to be before October 31. 

Take me back to the top!

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