Importance of Financial Planning

Importance of financial planning and the steps involved.

Financial planning is the process of utilizing your available financial resources in the best possible manner so that you achieve your goals.

Why do you need to have a financial plan?

1.     Inflation Impact:  When your mother goes grocery shopping and comes back, I am sure you must have heard her saying. I bought rice today at Rs 50 per kg , I used by the same rice at Rs 10 per kg when you kids were younger. This is inflation. Steady increase in the prices of goods and services. As the prices of these goods and services increase so does the cost of our future goals. If today it costs 25 lacs for higher education abroad, it would cost 73.4 lacs when your kid grows up after16 yrs, if inflation is at 7%. Inflation has a compounding effect.

2.     Contingency fund availability: You may never know when the job scenario turns gloomy. Also the yearly hikes are not in line with the prevailing inflation. And so planning becomes of utmost importance.

 With elderly parents in house and unexpected medical instances on the rise, it calls for keeping contingency fund ready for such situations. When people don’t plan for future goals and have surplus income, second home is the preferred choice of investment which is a very illiquid asset….financial planning helps you take into account not just your long term goals but even your short term needs.

A thumb rule suggests keeping 6 months’ salary in highly liquid form for this need.

3.     Retirement: Like our father’s generation, we will not be supported by any pension structure and so planning for the retire life is a crucial aspect. With life expectancy on the rise, it becomes all the more important to plan your retirement

You would need a retirement corpus of 5.2 cr, if your monthly expenses are @ 50 K today, if you wish to retire at 55 and may live till age of 80 yrs.

4.     Insurances: Financial planning helps you know your worth, which in turn helps you asses your insurance needs which shield you family from financial loss in case of life loss or any medical condition.

This gives you a sense of security as you are adequately covered.

5.     Investments are tied to goals: Since any money decision impacts your financial planning, you keep your money decisions in line with the financial plan like decisions on tax planning, insurances, etc. This also keeps you away from ad hoc investments. Also you do your tax planning in advance in line with your goals.

6.     Cash flow management: Financial planning  helps you manage your inflows and outflows in a way that you utilize your resources in the best way to achieve your goals. Helps you cut out unnecessary expenses and gives a strong hold over your financial situation.

7.     Achieving your financial goals: You achieve your goals comfortably as you start early and have a solid plan to meet your goals.

Now that you know why financial planning is essential, below are the steps which would help you put a financial goals together:

Steps for putting together a financial plan:

1.     Understand your current financial status

2.     Write down your goals

3.     Select investment avenues for your goals

4.     Implement your investment decisions

5.     Review your investments periodically