Financial Planning is utmost important when you have limited resources.
It helps you to identify long term and short term goals and also to achieve it through proper planning.
What is financial planning?
Financial Planning is the process of meeting your life goals through the proper management of your finances.
Life goals includes marriage planning, retirement planning, going on a vacation, buying a home, child’s education planning, etc.
You may have invested in mutual funds, stocks or in insurance randomly. Financial planning will help you to do goal-based Investing.
Here are 8 reasons why you need a financial plan:
- It helps you to create long term and short term goals
Financial planning helps you to identify your life goals. Through proper planning, you can achieve your long term and short-term goals easily.
As per your goals, financial products such as mutual funds, stocks, debt funds, PPF, NPS etc. can be selected. Various calculators are also available online to calculate investment required to achieve your goal.
A Goal without plan is just a wish.
- Contingency planning
People don’t have habit of saving money for emergency. They realize it when emergency arises. In case of any urgency, they may have to take loan or credit from relative. Emergency may include situations like urgent hospitalization, accident, job loss and other urgent commitments.
Financial Planning helps you to build and maintain emergency fund. You should save 2 months of your income in Saving A/c and 2 to 3 months of your income in FD or liquid fund. So, in case you need money, you can easily use it.
- Goal based Investing
If you are not following goal based Investing, then you are just investing to chase return which will eventually make you fall in trap of greed and fear. Financial Planning will help you to identify goal, make tactical asset allocation. Goal based investing sets reasonable and achievable returns, so you won’t have high expectation and will not fear by market fluctuation.
Most important aspect of financial planning and individual’s life is retirement planning.
Many a times, people tend to avoid retirement goal with a view that they still have a time. But that is not correct and they start investing at 35 or 40 years, so monthly investment amount also tends to be very high. Earlier you start, better it is.
Financial planning helps you to build retirement corpus and helps you to strategically invest in different product to achieve the corpus amount.
- Budgeting & Cashflow Analysis
Budgeting helps you to save and invest more money. Cashflow analysis will help you to identify areas where unnecessary money is spent and help you to save it. You can use golden saving 50/30/20 rule. As per this rule, 50% of your income should be spent towards your basic needs. 30% towards your wants and 20% should be saved for retirement and other goals. Cashflow analysis also helps you to identify where more cash outflow in going and take necessary steps to reduce the same.
- Insurance planning
As per recent survey, India is world’s second-most underinsured country. It is because of lack of financial knowledge or buying policy because agent is relative or friend.
Selecting right insurance policy and being adequately covered is very important. Once comprehensive financial planning is done, you can select right amount of policy based upon your assets, loans, liabilities and other factors.
- Asset allocation as per risk profiling
You shouldn’t invest all your money in equity. It can be too fluctuating. Primarily, your asset allocation should be as per your goals and invested accordingly. Financial planning will not only help you to make asset allocation as per your risk profile but also help you to rebalance your portfolio time to time. For example, if you want to achieve your goal after 10 years your asset allocation may be 80% in equity and 20% in debt.
- Tax saving strategies
We try to save tax through investing into different options. So, Investment planning becomes the result of tax planning. Actually, it should be vice e versa. For tax saving purpose, we invest in tax saving funds, buy insurance policies that too at the end of the year. This should be avoided.
Financial Planning will help you to create balance between your tax planning and investment planning. For example, if you have any long term goal for which 20% is allocated to debt. Then such Investment can be done in PPF. Due to this tax benefit can also be availed and goal based investing is also done.
From all the points discussed above, we can conclude that financial planning is very important in this era. Find a good financial advisor and create your own personalized financial plan ASAP.