People are usually confused between the term financial planning and wealth management. Are you one of them? Both the terms are related to money and sound similar. Financial planning and wealth management have a thin line of difference between them, but this is enough to unfurl the vast variations amongst these two terms. So let us understand the fundamental differences between the two and their advantages individually.
What is Financial Planning?
Financial planning can be considered as the basic management of the finances that you are able to draw from your job or your business. You can compare it to the management of your daily funds that you have to chalk down properly to attain your financial goals. It can be considered as a mapping task and allotment of cash to the different requisites of your day to day life irrespective of your income level. Financial planning is essential to be self-sufficient and save yourself from monetary shortage at any given point in life. Financial planning measures your current financial condition against your risk profile and helps you set specific, measurable financial goals. Financial planning also comprises of efficient tax planning, budgeting, income and investment planning, insurance, and retirement planning. Hence it gives you a clear idea as to which direction to follow while taking each financial decision.
Advantages of Financial Planning
- Gets you to control your expenditures: Having a good disposable income in hand can make you want to make large expenditures, both necessary and unnecessary. However proper financial planning restricts this option. Yes, you have heard it right, financial planning helps you to take control over your expenditures and whenever you hear your mind saying “yes, yes” for an unnecessary expense your brain says a straightforward ‘no.’ Creating a budget beforehand gives you a brief on how much money you can spend and how much you need to save. This saves you from leading a hand to mouth life and from unnecessary borrowings. It also helps you attain your future financial goals
- Has a future-oriented aspect to it: Financial planning also helps you in securing your future. If you use up all the income that you generate, then you are sure to exhaust it up at a fast pace and be left with nothing in the event of a financial emergency, So it is better that you plan out your finances and start saving. There are ample numbers of saving instruments that you can opt for such as mutual funds, fixed deposits, recurring account, PPF, etc. Make it a habit of befriending these saving modes every month so that you have an emergency fund with you always.
- Funds your dreams: If you have a desire of owning your dream house, then you also need to know the phrase “Rome was not built in a day.” You have to invest time and finances to realise your dreams. Financial planning is vital when it comes to realising dreams. Financial planning helps you proportionately save a significant part of your income and plan well in advance for your dreams to come true.
- Enhances your living standards: Another significant advantage of financial planning is that when you make decisions in advance as to how much to spend and where to spend and then stick to your financial plans, then you will be able to maintain and enhance your living standards each month without having to compromise on any of your basic needs or dreams.
- Improved debt management: Financial planning can help you track monthly interest payments, add it to your budget and give you the true picture of your financial performance. It will also help you reduce your debt amount and interest repayments.
What is Wealth Management?
Wealth management is all about preservation, growth, and enjoyment of your wealth. Wealth management is about taking active decisions to recognise opportunities that amplify and preserve wealth. It deals with the management of a large number of asset classes or management of a set of assets for an individual. It is indeed reserved for the rich as it completely revolves around making more money from the existing money for the moneyed class.
Advantages of Wealth Management
- Helps in tax optimisation: There are various benefits of hiring wealth managers for performing the wealth management hack; one of it is ‘tax optimisation.’ Nobody likes to let their hard earned money go to the hands of someone else, not even the government. In such a case a wealth manager can help you out in minimising the amount of the tax to be paid by investing your money and allocating your assets in such a way that you cut down on the taxes and save bucks for the generation to come.
- Developing strategies based on gap analysis: Having a well set up wealth management directory gives you a clear outlook about how much you have in hand, how much you have invested and how much your investments are making. This serves as an essential aspect to decide on how much more you can invest in your business and develop strategies accordingly for the funding process. Wealth management helps in assessing the gap between your current financial status and your financial goals and bridges the gap to meet growth expectations.
The first step towards wealth management is financial planning. They are both equally important. Planning your finances well will lead you to a stage where you need to get a wealth manager planning your wealth. Financial planning does not require you to have wealth but even successful wealth management requires financial planning. Wealth management begins at the word wealth and aims at fore folding your investible surplus. Hence financial planning is the first step towards generating wealth and everyone needs financial planning, and wealth management is the second step in the game and works for you beyond the basics.