The difference between financial management and financial planning could be difficult to ascertain. However, you should understand it as well as you can as both the activities add value to your financial life but have different purposes. You will need financial management far more often than financial planning.
So, let’s explore the terms further and understand how they can be useful in your financial life.
Financial management is the name of day-to-day financial decisions you make to ensure that you can meet your immediate goals for saving and expenses. In other words, you can say that financial management will help you meet your financial targets efficiently.
This may require an understanding of the best practices and extensive knowledge of financial instruments such as credit cards, loans, FDs, RDs, etc. However, the financial targets you want to achieve with financial management do not include your life goals.
The concept of financial planning originated in the 19th century with the rise of life insurance and the need for estate planning for wealthy families.
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You would want to achieve the following objectives with financial management:
Keep your expenses within the budget
Meet your monthly and annual savings targets
Ensure optimum use of available funds
Ensure fast conversion of savings to investments
Ensure availability of funds for necessary expenses
Maintain low cost of funds, i.e., when borrowing
You can also include looking for the least costly alternatives for large expenses under financial management objectives.
Financial planning is a more comprehensive and holistic exercise in your financial life. The Financial Planning and Standards Board (FPSB) defines financial planning as a process of developing strategies to help people manage their financial affairs and meet life goals.
Here, the words – ‘strategy and life goals’ are very important, as a financial plan is usually a document for your life’s financial journey. Thus, a financial plan is a strategic document, which aims to draw a roadmap toward all short, medium and long-term life goals.
Financial planning objectives are long-term and may continue to apply for life. The following five financial planning objectives are the most common:
Understand sources and applications of funds
Understand life’s important financial goals
Prepare for contingencies
Build a roadmap to meet life’s long-term goals in a tax-efficient manner
Prioritise fund allocation to needs, goals and aspirations in that order
Financial planning objectives will also define the roadmap.
Financial management and financial planning are two different skills. While both add value to your financial life, you may need expert assistance in at least one. Here’s why:
| Financial Management | Financial Planning |
|---|---|
| Exploits tactical advantages (deals, discounts, etc.) | Gives a long-term vision for personal finance |
| Short-term, transactional decisions | A long-term, comprehensive strategy |
| Deals with day-to-day transactions | Deals with the overall financial roadmap for life |
| Requires negotiation skills | Requires skills in financial mathematics |
| Necessary for turning savings into investments quickly | Necessary to build an adequate corpus for long-term goals |
| Focuses on immediate financial needs | Focuses on financial stability in the long run |
Financial management is often a skill acquired by sheer experience. How well you can use your credit cards to spend money without sinking into debt is one example of good financial management. Meanwhile, staying prepared for emergencies like hospitalisation and saving adequate money for retirement are the results of a good financial plan.
Financial management is a necessity even if you find this hobby difficult to pursue. You should use the following instruments to organise and improve your financial management:
Budgeting is the exercise you need to conduct at least once a month. But the best results will arrive when you have an annual budget as well. The idea is to maintain your annual targets. Even if you happen to exceed your quota for a month, you can recover and maintain your annual budget limits.
One step that a lot of investors often miss during budgeting is that you need to also keep a note of your expenditures. Use a spreadsheet or a mobile app to immediately take note of your outflows in the day. This will help you tally your spending habits with your budget limits.
You should know your bank account very well. Most of the transactions in your financial journey will start and end with your bank account. So, it is very important to know what you can and cannot do with it. For example, most banks with internet banking allow the following investment options:
Bank FDs
Corporate FDs
Public Provident Fund (PPF) investments
Credit Card payments
Recurring Deposits
Knowing what you can do and how much it will cost with your bank gives you an edge in your transactions, including investment
3. Debit/Credit Cards:
Debit and credit cards are common instruments for daily transactions. Using them carefully can allow you multiple benefits. However unrestricted and indiscriminate usage may also lead to financial hardships.
Thus, anytime you take a debit or credit card, try to understand your benefits from them well. Most debit and credit cards offer points for the money spent.
If you have surplus money in your bank, you can use a line of credit using your FDs. A line of credit allows you to use the money in fixed deposits even before maturity. The interest rate on the line of credit (lien on FD or Overdraft) is usually lower than other credit instruments.
Almost all investment options including the instruments of financial management can become a tool in your financial planning. However, financial planning deals with majorly investment and insurance avenues.
Both insurance and investments in financial planning will provide solutions for long-term financial needs.
Here are a few prominent instruments of financial planning:
Term Life Insurance: Term life insurance is a necessary investment, especially when you have dependent family members. A term life cover of 10-15 times your annual income is sufficient for your family to look after the following after your untimely demise:
Their regular living expenses
The cost of important goals
Repayment of any ongoing debt
Repayment of Any Ongoing Debt: The importance of Mediclaim and critical illness insurance is not hidden. Family Mediclaim insurance will come in handy in emergency health situations. However, critical health insurance will offer a lump sum benefit in the case of a diagnosis of illnesses such as heart failure, cancer, etc.
Unit Linked Insurance Plans (ULIPs): ULIPs are long-term diversified investments that provide tax benefits. Other important ULIP features are listed below:
Partial withdrawals after five years
Invest in a mix of diversified funds of equity and debt
Bonuses for long-term investors
Invest up to the age of 99 years with plans from Canara HSBC Life Insurance
Use automated strategies to manage equity investments
National Pension Scheme (NPS): NPS is directed towards building a retirement corpus. Investing in NPS allows you to benefit from the following features:
Invest in a diversified portfolio of equity, debt, and alternative assets
Use automated strategies to manage portfolio risk
Select from a range of mutual funds to invest in as per your choice of asset and risk profile
Tax saving with equity mutual funds – ELSS
Flexibility in investment and withdrawals
Choice of systematic withdrawals and investment
Financial management and financial planning are two powerful tools that work together to empower you on your financial journey. While they may seem similar, they serve distinct purposes.
Financial management equips you to handle everyday finances effectively. It's about budgeting, utilizing bank accounts strategically, and leveraging instruments like credit cards for optimal benefit.
Financial planning, on the other hand, takes a broader view. It's about crafting a roadmap to achieve your long-term financial goals, like retirement or your child's education. It involves instruments like term life insurance, mutual funds, and National Pension Scheme (NPS).
Think of financial planning as your roadmap, and financial management as your driving skills. Both are essential for a smooth and successful journey towards financial security.
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The 7 steps of financial planning typically involve:
Data Gathering: Assessing your current financial situation, including income, expenses, assets, and liabilities.
Goal Setting: Defining your short-term, medium-term, and long-term financial goals.
Risk Assessment: Evaluate your risk tolerance to determine suitable investment options.
Investment Strategy: Create a plan that allocates your funds across different asset classes based on your risk tolerance and goals.
A 10-year financial plan is a roadmap outlining your financial goals and strategies achievable within a 10-year timeframe. It might focus on specific goals like saving for a child's education, buying a house, or building a retirement corpus.
Financial management involves the day-to-day handling of your money. Here are some key activities:
Creating and maintaining a budget
Tracking income and expenses
Managing your cash flow
Saving for short-term goals like emergencies or vacations
Paying bills on time
Minimizing debt
Using financial instruments effectively (credit cards, bank accounts, etc.)
Financial management is crucial because it empowers you to:
Take control of your finances and make informed decisions.
Achieve your financial goals
Build a secure financial future
Manage unexpected expenses
Reduce financial stress
The primary function of financial management is to ensure you efficiently utilise your financial resources to meet your current and future financial needs. It involves planning, budgeting, and making informed decisions to optimise your financial well-being.
