Why is Financial Planning Important?

What is the first thing that you do when you want to achieve a goal? You plan. The plan acts like the foundation.

However, many people are not familiar with the importance of financial planning. Many individuals who have booked Fixed Deposits and few SIPs running in mutual funds believe that saving and investing is financial planning.

Investing without a goal in mind or proper plan is ineffective and may not help you in achieving your financial goals.

Financial planning is necessary if you want to achieve your financial goals like going on a dream vacation, buying a house or children’s higher education.

So, what is a financial plan?

Think of financial planning as a route on Google Maps that helps to reach your destination. It takes care of any unintentional wrong turns or road blockades and suggests the best course of action.

Financial planning is the route to achieve your financial goals and takes care of unforeseen emergencies.

Financial planning is an exercise to evaluate your current and future financial position by considering your assets and liabilities and helping you to achieve your goals. It makes you prepared to handle expected and unexpected expenses.

In simple words, financial planning includes budgeting, setting SMART goals, investing in right assets as per the risk tolerance and goals, proper asset allocation and building an adequate retirement fund. Inflation, which is the general rise in price of goods and services over a period of time, is one of the major reasons that makes financial blueprint inevitable.

E.g. the college fees of an MBA will increase over the years. However, if you are saving up for kid’s college, you also have to consider the inflation rate of MBA fee. After you come to the future value of your goal, you can plan for it properly.

A certified financial planner can help you create your financial plan.

Who requires financial planning?

Before we go deep into the creation of a financial plan, let us understand who can benefit from financial planning.

If you don’t know where your money is going

Do you scratch your head after just one week of salary day wondering where all your money went? Then you really need a financial plan so that you save and invest a part of your salary.

You want to get out a debt trap

Most people take credit to build a better lifestyle and buy products. However, the easy access to credit cards and loan products has hurt the financial health of many borrowers. A financial plan will help you become debt free or at least free from bad debt such as credit card debt.

Want a road map to achieve your financial dreams

You will need a financial plan to achieve your financial goals as it provides a framework for your goals.

Your investments are scattered

If you have invested in several funds without any aim and all your investments are scattered, financial planning can help you to structure your investments, merge your investments and tag financial goals to your investments.

These were just some cases where financial planning can immensely help you.

Basics of financial planning

Here are some of the basics of financial planning that you need to know before you sit down for financial planning.

Define your financial goals

The basic aim of planning your finances is to help you fulfil your life goals. For starters, you can start by writing down your financial goals. If there are too many things on the list, you need to prioritise your goals. If nothing comes to your mind, here are some common life goals that require financial planning: buying a house, car, children’s education and marriage.

Also, it will help you have SMART financial goals that are Specific, Measurable, Adjustable, Realistic and Time Bound.

You can also list your financial goals into short term, medium term, and long term financial goals. Short term, medium term and long term financial goals can be goals you want to achieve within 2 years, 2 to 5 years and after five years, respectively.

Make a budget

Raise your hand if you have tried to budget, but failed miserably. You are not alone.

Budgeting is about taking a good look at your income and how you spend money so that you can make effective use of your money and make adjustments to achieve your financial goals.

Nowadays, there are several budgeting apps that can help you track your expenses and set limits on different categories. You could also start the old-fashioned way of using a pen and notebook.

Have an emergency fund

An emergency fund is the most important aspect of a financial plan. Life is uncertain and job loss, accidents etc. can happen anytime. An emergency fund or a contingency fund can help you tide over such unexpected events.

You can have at least six months of expenses in that fund. Include rent, EMIs and other expenses in the fund.

Asset allocation

Asset allocation is the crux of financial planning. Asset Allocation is the mix of different asset classes such as equities, debt and commodities in your portfolio that will help you achieve your financial goals.

The right mix of the different assets will depend on your risk-taking capacity and timeline of your goals.

Each asset class has a different function and performs differently during the same phase of the market cycle. Equity investment can help you build wealth, debt investments aim to protect capital and commodities like gold acts as a hedging instrument.

Review your financial plan regularly

A financial plan should work for you. You should regularly review your financial plan if you want to evaluate the effectiveness of the plan. Tweak or make required changes in your portfolio and financial plan to inch closer to your goals.

E.g. You may check the performance of your funds and stocks and take appropriate measures. Also, if your equity exposure in your portfolio has increased because of the recent bull run in equity markets, you can reduce your equity exposure by selling equity investments or increasing debt investments.

Conclusion

Financial planning is important for everyone, and it lends a structure to your finances. A financial plan can help you figure out your goals and achieve these financial goals.

You can consult a certified financial planner listed on our website to help you with financial planning.