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Financial planning is formulating a plan, a strategy that will cover you and your loved ones upon reduction or cessation of income due to death, disability, critical illness, or if you are hospitalized or out of job.

A Financial Plan also deals with how much you would need for your retirement, your children's education and also your personal dreams like buying a car or traveling overseas.

Financial Planning is not rocket science; it's how smart you are with your money, that's all. The integral parameters of a sound personal financial plan are –

1) Protection

2) Savings (medium and long term)

3) Investments

Notice that protection is the first parameter of financial planning. Insurance provides a hedge against risk. In personal financial planning it means protecting your income against death, disability and illnesses.

Say for instance John. An engineer with a wife and 2 children. He earns $ 4000 a month. In 10 years John would have earned $ 480,000. Cut 60% of that for family related expenses which is $ 288,000. Should John die today family would have a huge short fall of $ 288,000. Having an insurance policy would be able to cover this shortfall so allowing a similar lifestyle for his family.

The second parameter of financial planning is savings. Savings is highly important because there will be events in your life which would require you to spend money. Be it your wedding, your child's university education, renovating your house and most importantly your retirement. These things costs money.

It is essential to save at least 10% of your salary, remember, pay yourself first!

The third parameter we consider is investment. It is a good idea to start investing after setting aside cash for emergency funds. This can be about 3-6 months of your salary. To ensure that you have enough cash in case you lose your job or for funeral expenses.

Now you may ask why not keep all money in the bank? This is because if you do that you'll lose money. Currently inflation is about 3 percent. You lose 3 percent or more every year on inflation. Without your bank offers you more interest, putting money in the bank eats your purchasing power. A plate of noodles in the sixties cost 5 cents. Today it costs about $ 3.00. That is a 6000% jump in about 40 years!

Investment on the other hand allows you to grow your money. Start by educating yourself on investments or consult competent professionals that deal with investments day in day out who can give practical and sensible advice.

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Source by Deepak Buxani