Importance of Financial Planning
The good thing is that a lot of investors, especially among the younger generation, are appreciating the importance of financial planning quite early. The financial planning importance arises from the fact that it is about your future and your future financial goals. Here we focus more on personal financial planning importance in terms of having a worry-free future, where the risks are covered and the returns are ensured. Of course, the actual personal financial planning importance arises from the fact that it helps you meet your life dreams and goals.
Use of Financial Planning
Financial planning is a methodical and iterative approach to meeting life goals. The importance of financial planning arises from the fact that it acts as a guide through your journey. The importance of financial planning also arises from the reality that it gives you full control of your income, expenses, and investments and directs your efforts towards these financial goals.
- Financial planning helps you increase your savings. You may still save money without having a financial plan but it is likely to be patchy and haphazard. To make the savings process more methodical and actionable, it is necessary to have a financial plan.
- You never know what you can achieve with a financial plan till you get down to it. Financial planning ensures a better standard of living. That does not happen by sacrificing your standard of living but by plugging leakages and cutting on profligacy.
- Financial planning makes you better prepared for emergencies. Creating an emergency fund is a core aspect of financial planning. Typically, the emergency fund should be 5-6 months of monthly flow. That does not impact your core investments in an emergency.
- This may sound mundane, but a key aspect of financial planning is that it helps you attain peace of mind. With your long-term health concerns, life needs, and costs taken care you are surely in a much better state of mind.
- Even if you know your goals, do you know how to get there? That is the importance of financial planning. Financial planning helps you manage money efficiently and encourages you to cut high-cost debt and invest in assets to create wealth.
- Finally, the financial plan is your ticket or your gateway to your life goals. Of course, we are talking about financial goals. Typical life goals include the creation of a wealth corpus, planning your retirement, planning for the education of children, planning their weddings, planning a peaceful retired life with your spouse, spending on travel and hobbies. All these are great ideals but entail a cost.
Benefits of Financial Planning
Having broadly understood the importance of financial planning, let us also take a quick look at the benefits of financial planning. Here are 4 key benefits of financial planning.
- Financial planning helps to tackle inflation. But how does it happen? Costs have been going up steadily in the past and will continue to go up steadily in the future too. That is what inflation is all about. It eats away your returns and income in the future. For example, if you are earning 5% on your investments and the rate of inflation is 6% each year then annually you are only losing purchasing power. That is where financial planning comes in handy to make a plan for post-inflation on your investments and invest in assets that can give sufficient inflation-adjusted returns.
- Financial planning helps create a contingency fund. We live in a situation where the future is uncertain and we are up against health and other emergencies at all points in time. That is why financial planning makes the creation of an emergency fund a building block for the creation of a financial plan.
- Financial planning has a big focus on creating a substantial and sustainable retirement corpus for your future. With progress in science, people are living longer and healthier. So, your retirement corpus needs to last longer so you can relax in your retirement period. Retirement planning is an integral part of your financial plan and saves you the worries in the later stages of life.
- Finally, remember that financial planning is all about managing your money in the best possible manner to reduce your costs and enhance returns. For example, parking your savings in a bank account is safe but not prudent enough. That is not the best way to deploy your money because avenues like mutual funds can give much better and more tax-efficient returns over a longer period.
How to Start Financial Planning
Financial planning is a meticulous and step-by-step methodical process. Here are the key steps in financial planning as you start.
- You start with your goals written down on a piece of paper and translated into financial numbers. You have to put a monetary value on your goals because otherwise how do you plan for these goals.
- The next step is to properly understand your current financial situation. That includes your balance sheet and includes your current income flows, expense patterns, lifestyle spending, borrowings, savings, investments, etc
- The third step is to write down your financial plan on paper get it vetted by your financial advisor and take the key stakeholders like your spouse and children into confidence so you have their buy-in.
- As a next step, scour for the most suitable investment options. The choice is huge. If you just consider mutual funds, you can choose from over 2,500 schemes and plans. Then there are bonds, gold, tax-saving instruments and all must fit into your plan.
- It is now time to implement the right plan and implement the plan right. Select the right investment option based on factors such as your goals, age, risk appetite, and investment amount. This is the actionable part of the financial planning process.
You must also make it a point to regularly monitor, review and evaluate your financial plan and make necessary changes where warranted.
Frequently Asked Questions Expand All
Financial planners help with lifetime goals and lifestyle planning. This includes budgeting, cash flow planning, college planning , retirement planning etc. The clients are more generic in nature. Wealth Management provide services primarily to high-net-worth individuals (HNWIs) and ultra-high-net-worth individuals (UHNWIs); including capital gains planning, tax planning, estate planning and risk management.
The goal in financial planning to reach your goals in the most efficient manner by optimizing returns, risk, liquidity and tax implications.