What is Financial Planning? Steps, Benefits & Real-Life Use

Key Highlights
 

1. You first have to know about your current financial position, then your goals and then research different legal paths to achieve them. That is financial planning. 
    
2. The main components of financial planning are budgeting, emergency funds, debt control, insurance, and tax savings. 
    
3. Regularly review the plan you made. Invest in SIPs or recurring deposits if you can’t invest a huge sum at once.
    

Financial planning is the process of managing your income, expenses, savings, and investments to reach life goals. It helps you stay in control of your money and future.

For example, Riya earns ₹80,000 per month and plans to save ₹20,000 monthly. By investing in mutual funds at a 10% annual return, she can build around ₹15,00,000. This is what she wrote in her Excel sheet:
 

This is how an ideal financial plan should go. You use your income to pay off your bills and also save for the future. But not everyone can hire an accountable accountant for this purpose. So, let’s educate ourselves about our finances in this very blog!

What Is Financial Planning?

Financial planning includes an entire systematic process where you start by evaluating your current income, expenses, assets, and debts. Then, you set clear goals to manage and allocate your resources effectively over time. 

It is a dynamic, ongoing journey. This means you have to update your Excel sheets every week or every month. Your income, expenses, goals, and life situations will keep changing. So, your financial plan should grow with you and adjust along the way.

For example, Ankit is a 29-year-old techie from Pune. He earned ₹75,000 monthly but ran out of money by the 18th. After skipping a friend’s wedding due to a lack of funds, he created a plan, tracked expenses, and began monthly investing.

He used budgeting apps and simple planning to restructure spending. In just 6 months, there was a big difference in his finances as shown in the table below:

Know What The Steps in the Financial Planning Process Are

Since you now know you have to plan your finances after a fixed interval, it would be wise to know about the process associated with it. These 5essential stages lay out the roadmap:

1. Set SMART Goals

Start by defining what you truly want, whether short-term, medium-term, or long-term. You can also use the SMART framework to understand your goals. We have briefly explained it in the table given below:
 

SMART goals keep your vision clear and help track progress with motivation. If you don’t know what you're aiming for, how would you know where to invest and where to spend?

2. Assess Your Situation & Gather Data

Before planning, understand where you stand today. If you don’t know the reality of your present, your planning would be of no use. Do the following checks in your Excel sheet:
 

• Net Worth Calculation:
  List assets (savings, investments, property) minus liabilities (loans, credit cards).
   
• Cash Flow Analysis:
  Track your monthly income vs expenses to identify spending leaks and savings potential.
   
• Data Checklist:
  Check your bank & credit card statements, loan documents, insurance policies, and investment records.
   

3. Create & Follow a Budget

Once your financial goals are set, it’s time to give your money a plan. Budgeting is the bridge between your income and your dreams. It tells every rupee where to go instead of wondering where it went.
 

Here are 5 budgeting methods that you can use:
 

You can use these tools to simplify your journey:
 

• Excel or Google Sheets – Customizable and free
   
• Mint – Automatic tracking and bill alerts
   
• YNAB (You Need A Budget) – Goal-based planning and rule-driven system
   
• PocketGuard – Simple, visual "how much you can spend" dashboard

4. Handle Debt & Build an Emergency Buffer

Before you start investing, make sure your financial base is rock solid. Tackling debt and building an emergency fund protects you from surprises that could derail your progress.

Here are 2 methods that can help you with debt repayment.
 

You can choose either of the two methods based on your debt and your comfort. 

Emergency Fund

Build an emergency fund that covers 3 to 6 months of your essential living expenses like rent, groceries, and EMIs. If you're self-employed or have an unpredictable job, aim for 9 to 12 months. Keep this money in a liquid, easily accessible account like a high-yield savings or sweep-in fixed deposit for quick withdrawals.

 Do you know that about 75% of Indians do not have an emergency fund?

5. Investments and Tax Saving Options 

Once your financial foundation is stable, it’s time to focus on growing wealth and safeguarding it. This stage ensures your money works for you while protecting you and your loved ones from financial risks.

Before investing, match your financial goals to the right investment tools. Diversifying your portfolio helps reduce risk and improve long-term returns.
 

Choosing the right combination depends on your risk tolerance, income, and life stage. Don't invest all in one basket; balance is the key to stable growth.

Tax & Estate Planning
 

• Tax-Saving Instruments:
   
  • PPF, ELSS, NPS, and Tax-saving FDs help reduce taxable income
     
  • Use Section 80C and other applicable sections to optimise returns.
     
• Insurance Essentials:
   
  • Term Life Insurance – Income protection
     
  • Health Insurance – Hospitalisation expenses
     
  • Personal Accident & Property Insurance – Financial cushioning against shocks
     
• Estate Planning:
   
  • Draft a Will or Trust to secure your family’s future.
     
  • Name nominees and keep documents updated.d
     

This phase is all about balancing growth with protection. You’re not just building wealth but also shielding it from life’s uncertainties.

Benefits of Financial Planning

Financial planning isn’t just about numbers; it’s about peace of mind and purpose. A well-crafted plan brings structure, savings, and stability to every stage of life.

1. Clear Goals & Direction

A solid financial plan helps you define and prioritise your objectives. What are you aiming for: a home, sending your kids to college, or retiring comfortably? With a roadmap in hand, decision-making becomes focused rather than frantic.

2. Improved Control Over Spending & Savings

By tracking your cash flow and categorising expenses, you gain clarity on where your money is going. This way, you can make smart decisions, cut unnecessary spending, and save more. 

3. Reduced Stress via Emergency Preparedness

Knowing that three to six months (or more) of expenses are tucked away for emergencies dramatically reduces anxiety. You’re no longer scrambling when life throws curveballs like job loss or medical bills.

Real‑Life Examples & Use Cases

Let’s look at how financial planning plays out in real life for families, couples, and individuals.

1. Sharma Family: Monthly Budget & Protection

Example: The Sharmas earn ₹90,000/month. They use the 50/30/20 method, save for emergencies, and have basic insurance to protect their future.
 

This approach balances living expenses with future planning. Emergency funds and insurance provide safety against unexpected events.

2. Raj & Meera: Retirement Alignment Plan

Example: Raj and Meera, both 38, plan to retire at 60. They invest ₹20,000/month in SIPs and also account for taxes and health cover.
 

Their plan combines growth, tax savings, and medical protection. A defined target helps them stay consistent for long-term results.

3. Reddit User: DIY FIRE Journey

Example: Inspired by r/malaysiaFIRE, this user tracks net worth, budgets monthly, invests in ELSS & gold, and creates a basic will, all on their own.
 

This DIY approach provides structure and independence. It proves that even solo earners can build a strong financial plan without a financial advisor.

Conclusion
 

When you plan your finances, you gain control over them. You know where every single penny is going and what goals (short-term and long-term) should be there. The paths to those goals also become clear. Financial planning’s main purpose is to build wealth through budgeting, insurance, debt management, and investing. Once your Excel sheet is ready, review it regularly.

FAQs
 

What common behavioural mistakes hurt a financial plan?
People often panic sell, chase past winners, ignore diversification, or delay saving. Awareness and a written plan reduce these mistakes.
 

What are robo-advisors, and should I use them?
Robo advisors are low-cost online services that build and manage portfolios using algorithms. They suit beginners and those who prefer low-fee, automated investing.
 

How much do financial advisors charge, and are the fees worth it?
Advisors charge fixed fees, hourly rates, or a percentage of assets. Fees are worth it if the advice saves you more money or time than the cost.
 

How should inflation be handled in planning?
Always use a realistic inflation rate when estimating future costs. Higher assumed inflation means you need larger savings and more equity exposure for long-term goals.
 

What is estate planning, and why is it needed?
Estate planning sets out who gets your assets after you die. A simple will and nominee details prevent legal hassles and protect family interests.

 

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?