Advantages of Financial Planning

Last Updated: 10 Nov 2023

Have you ever wondered what are the advantages of financial planning? There are a few things you can infer right away. Financial planning helps you to close the gap between your dreams and your resources through directed efforts. In short, financial planning is all about making money work harder for you. But that is just one of the many advantages of financial planning. There are also extensive advantages of financial planning in terms of the psychological advantage that it proffers via-a-vis our goals. Let us look in detail at the many advantages of financial planning.

What are the Advantages of Financial Planning?

There are several benefits of financial planning as a distinct process. Here we look at some key benefits of financial planning.

1. Since we are all unsure of our financial future, the best you can do is to build safety nets to secure your future to the extent possible. That is one of the key benefits of financial planning. In short, financial planning provides direction and purpose to financial decisions. The financial goals tell you where you want to reach and the biggest benefit of financial planning is that it tells how to get there, giving much-needed reassurance.

2. One of the very important benefits of financial planning is that it makes dreams actionable. It is not just enough to sit and hope that you will have a contented retired life or that your child will study at Stanford. You need to work towards and that is one of the big benefits of financial planning. It helps you to take stock of the present, juxtapose it with future goals, and bridge the gap with smart investments and risk management.

3. It is said that the more you sweat in peace, the less you bleed in war. The same applies to your finances too. One of the untold benefits of financial planning is that it helps you to be prepared to meet all kinds of situations at all times. More importantly, every small effort eventually goes towards helping you meet your long-term goals. Be it your SIP or your budgetary savings or your tax-saving investments. They get a sense of direction. This forces you to look at practical answers and solutions to real problems.

4. Have you ever wondered as to why two people with the same income flow end up creating vastly different levels of wealth over time? The answer lies in the optimal use of resources at your disposal. A financial plan virtually becomes your strategy sheet to achieve your life goals through ups and downs by making the best allocation of resources and making every penny count. This is one of the benefits of financial planning that is often not appreciated enough

5. One of the biggest benefits of financial planning is that you don’t have to compromise on your lifestyle. Yes, you still need to avoid throwing good money after bad ideas. However, you can target a standard of living over several years by factoring in inflation and other factors and planning your investment allocation accordingly.

6. Remember, in the financial world, any degree of success is 10% skill and 90% perspiration. In the case of financial planning, this perspiration comes in the form of a forced disciplined life. This is one of the most important benefits of financial planning.

7. Last but not the least, one of the biggest benefits of financial planning is the expertise of an external expert that it brings in. These insights are extremely valuable when it comes to understanding the environment and customizing solutions to your needs. Expert advice is one of the key benefits of financial planning as it addresses everything from random planning to insufficient corpus to bad tax planning and weak liquidity management.

Mistakes to Avoid While Hiring a Financial Planner

Having understood the benefits of financial planning and the importance of a financial planner, let us look at some errors to avoid when selecting a financial planner.

The common mistake we commit is to stock to the known devil, for want of a better term. The idea is to look at multiple advisors and then make a choice. Let it be a choice by design than a choice by default.

• Don’t be obsessed by past performance alone. OF course, it does matter, but an understanding of the process, willingness to learn from mistakes, and integrity matter a lot more.

• It is a mistake not to have a clear understanding and term sheet with your financial planner. Let it be clear whether the planner’s job is just to help you invest or to hand-hold you through the entire journey from dreams to goals.

• Don’t hesitate to talk about the fees. The normal model is to charge a fee as a percent of AUA (assets under advice) plus a fixed compensation. Ideally, you can avoid financial planners who also double up as agents for product originators.

• Focusing more on the pitch and less on credentials is not a good idea. Most financial planners can give you a slick pitch, but integrity, cold expertise and a commitment to the science of financial planning matters a lot more.

What Should be the Main Objective of your Financial Plan?

Financial planning has some clear objectives laid out. Let us enumerate some of the key objectives of financial planning.

It must avoid extremes. Financial planning can help to avoid either too many funds or too little funds; both of which can be sub-optimal

• It helps to estimate the total capital needed right away and over some time to achieve the goals as laid out. Financial planning is never done with lump sum investments. It is normally a small lump sum and a large portion of systematic investing over the years. Financial planning segregates capital needs of short-term and long-term nature.

• To meet your goals, you need funds. These funds can either come in the form of their own lump sum money or regular money. The financial planning objective is to estimate the quantum of money and the timing of capital contribution to be made.

• One of the most important objectives is to prepare a defense mechanism against risks through insurance, risk management, diversification, etc.

Frequently Asked Questions

Where to start financial planning?

You can start right away. The sooner the better. Ideally start financial planning when you have started earning money, either through job or through business.

Are there any tools available for financial planning?

There are a number of online calculators like online planners, online retirement calculators, online goal-seekers etc. But these are generic calculators and not customized. Use these to get an idea, but you must sit down with your financial advisor and work out the nuances.