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.
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.