This article will answer your biggest question of – Why Should You Have A Financial Plan and will explain the wide importance and need of financial planning. Financial planning help you get better visibility of current and future money requirements.
Financial Planning is the process of utilizing your available financial resources in the best possible manner so that you acheive your goals. Good financial planning is the sound and quality decision making on the financial matters, with a future perspective.
Why Do You need to have a Financial Plan?
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 to buy 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 Rs. 25 Lakhs for higher education abroad, it would cost Rs. 73.4 Lakhs when your kid grows up after 16 yrs, if inflation is at 7%. Inflation has a compounding effect.
You may never know when the job scenario turns gloomy or the yearly hikes are not in line with the prevailing inflation. Therefore, contingency planning becomes very important for such scenarios.
With elderly parents in house and unexpected medical instances on the rise, it calls for keeping contingency fund ready for such situations. 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.
Like our parent’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.
For example, a 35 year old would need a retirement corpus of Rs. 4 Crores, if his/her monthly expenses are of Rs. 50,000 today; wishing to retire at the age of 60 years, with life expectancy of 85 years.
Having a financial plan helps you prepare for risks. Risks are unforeseen events that can cause financial distress. The worst-case contingency is an untimely death, which can result in financial distress for the family, apart from the emotional trauma.
Financial planning can help us prepare for such contingencies through adequate life insurance. Another contingency is serious illness that can have an impact on your savings and consequently your short term or long term financial objectives. A good financial plan will make adequate provisions for health insurance.
Since any money decision impacts your financial planning, you must keep your money decisions in line with the financial plan like decisions on tax planning, insurances, etc.
This also keeps you away from making any ad hoc investments and from inefficient tax planning.
Financial planning helps you manage your inflows and outflows in a way that you utilize your resources in the best way, in order to achieve your goals.
It helps you in cutting-out unnecessary expenses and gives a strong hold over your financial situation.
You can achieve your goals comfortably if you start early and can have a solid plan to meet your goals.
However, it is never too late to start planing towards and for the achievement of your financial goals, which may help you in gathering up and prioritizing your goals and working towards achieving them.
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Tagged Cash flow management, financial goals, Financial Planning, Financial Resources, Importance of Financial Planning, Why Financial Planning?