Financial Planning gives you clarity in life, provides direction & meaning to your financial decisions. Importance of Financial Planning can be understood from the statement of one of our clients “I am just concentrating on the financial plan you have advised me. I am relaxed. I have no anxieties and am having a peaceful sleep. I am confident that we will be able to maintain our current standard of living after retirement also.”
What’s the benefit of Financial Planning – Relaxed life, No Anxiety, peaceful sleep. I think this answer is totally different from what most clients expect initially.
I wish I had a house by the beach.
I want to get my children educated abroad.
I desire to be rich
These statements are just wishful thinking if you do not plan your finances to achieve them. It is not only knowing how much will it cost to fulfill these wishes. There are many other things involved – how to save money for it, taxation aspects, how much to earn, save and spend so that these goals can be reached. Basically, you have to plan for your goals else it is difficult to achieve these dreams or goals.
Financial Planning is the process of determining ways to earn, save and spend money and the amount you need to earn, invest and spend. By planning your finances, you manage your money such that you reach your life goals.
There is no single definition of Financial Planning but important is – the process should help you achieve your goals & bring peace of mind. Read – What is Financial Planning?
Importance of Financial Planning
Financial Planning plays an important role in different aspects –
- It provides direction to your goals or dreams. Financial planning helps you understand your goals better in terms of why you need to achieve these goals and how they impact other aspects of your life and finances.
- Financial planning encourages you to manage inflation. You are aware of the price of various things and activities. You plan your budget in a better manner.
- Financial planning makes you disciplined towards money. You do not spend unnecessarily. You keep a check on your savings and spending.
- By planning your finances, you plan for the future. You are able to gain visibility into your finances in the future. You have a fair idea of how much money would you have, say ten years down the line. You would be aware of the returns your investments should earn to achieve your goals.
- What about peace of mind – But why people avoid Financial Planning – strange reasons
Importance of Financial Planning in every aspect of finance –
Income – When you have a financial plan, you manage your income better. You are aware of how much you earn from salary, interest earned, dividends etc. This will help you to understand how much you are earning and if it is enough to earn to achieve your objectives. (if you have a choice or if you don’t have a choice at all)
Expenses – We spend money on basic needs, wants and splurge on luxuries. If we plan our finances, we will keep an eye on our expenses. Even if we go overboard in one month, we will know how much to cut back in the following months to stay within budget. Spending changes with changes in lifestyle and stage of life. This will help us determine income requirements and we can make changes in our earning capability accordingly.
Savings – You record your income and expenses in the financial plan. Therefore you know your savings. Financial planning gives you an idea of how much money you need to achieve your objectives. You make a budget and therefore can assess whether you are within budget or overspending. This will help you understand your savings rate and how much you need to save to reach your goals.
Investment – A financial plan will help to choose the right investments as per your income capacity, risk profile and goals. The financial plan will have the investment portfolio and asset allocation details. This can help you to have a balanced portfolio at all times.
Taxation – Thinking about taxes in the last week of March is not a prudent idea. With a financial plan, you can assess your tax outgo at the beginning of the financial year. You can plan your finances such that you pay the least amount of tax in a legal manner.
Retirement – We all want a carefree, relaxed retirement. It is possible only if you plan your finances such that your lifestyle is taken care of. You should have cash reserves to take care of medical expenses and other emergencies. A proper financial plan will have the retirement goals listed and the income, expenses and investment details. This will help you determine steps to achieve your goals.
Estate Planning – Estate planning refers to the provisions made regarding your wealth and its distribution smoothly after your death. The amount of wealth is not important here but the details regarding how assets and liabilities are to be taken care of is important. The financial plan will have a broad outline of what is to be done so that those taking care of your finances know what steps are required to be taken to manage your estate.
Ups and downs of Financial Status – There are many changes in our life. You get married, you can lose your job, you win a lottery or a loved one becomes critically ill. You make some money decisions which affect your standard of living. Such changes can lead to positive or negative changes in your financial status. Financial planning anticipates financial requirements in different conditions and ensures smooth financial flow at all times.
Check – Financial Planning Infographics
Here is a broad outline of what is to be done to create a financial plan –
- Set up the financial goals either by yourself or with the guidance of a financial planner. How to set SMART Goals?
- Collate all relevant data required to set up a financial plan. Data can include financial objectives, annual income, spending estimates, loans taken, the expected rate of return on different assets etc.
- Analyse the data collected to find out your true financial position. Try to find out appropriate investment avenues.
- Develop the financial plan taking into account the goals to achieve and the current means. The plan will help you draft realistic goals and how to achieve them.
- Put the plan in action. Check the tasks to be done and start executing the steps. For example, the plan, depending on the financial situation and investment profile show different options. For example. it might be considered that you can invest some amount in an Equity mutual fund or you can’t invest a single additional penny in equities based on your risk profile.
- Monitor and review the plan regularly. You can set up a meeting with your professional planner if any who can guide you to take prudent decisions regarding your money. If required, the plan should be tweaked to be relevant to your current financial situation.
One of the most shared articles on TFL – Financial Planning Thumb Rules
Of course, it is not possible to predict the future. But a sound financial plan will help you and your loved ones to tide over the good and bad. If you have any question regarding your financial plan feel free to ask.
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