Why do I need to do financial planning?
Many investors generally feel that they have been saving a reasonable amount of money regularly in bank FDs, shares or SIPs to carry out financial responsibilities and that there is no need for drawing out a financial plan. What is missing here is the understanding that investing in an ad hoc manner is simply not an efficient way of allocating your hard earned money. Consequently, over years, one may even end up missing out on achieving key financial goals.
Investments done without a financial plan is akin to a run-chase in cricket without knowing the total runs required to win. An investor may be under the illusion that he/she is scoring at a reasonable pace but it may just not be enough to win. Chances are that you will fall short by a wide margin. Also, one cannot take chance with long terms financial goals such as retirement planning, child’s education and marriage, building an emergency fund or saving for a dream house. In the game of cricket, one may get a second chance in the form of next match but getting a second chance in achieving financial life goals is very difficult.
What many investors often fail to recognize in their savings journey is the combined impact of inflation and taxes on their investments and income. Over the years, inflation can eat into your savings in a big way. For example: With inflation at 6%, a simple household expense of Rs.40,000 per month today will become ₹ 1.28 lakhs per month after 20 years and an MBA from good B school which currently cost about ₹25 lakh will balloon to ₹ 60 lakhs in 15 years.
This is where financial planning comes to rescue.
A financial plan enables an investor to construct a road map to achieve all the financial goals in a planned manner without any shocks or surprises. Furthermore, financial planning is a holistic exercise to evaluate your current and future financial standing such that a financial plan can be prepared. This will ensure that the investor will not only have access to adequate amount of money to fulfill goals but also to ensure that the money is available at the required point in time.
The process includes understanding one’s financial situation, setting SMART life goals, selecting right investment options and asset allocation, implementing a financial plan and finally reviewing and monitoring that plan periodically.
Benefits of Financial Planning
Financial planning has numerous benefits and it can have far reaching positive impact on one's life. It not only helps you to reach your financial goals but the entire financial planning process also brings lot of clarity as to what are one’s key Financial goals. This clarity gives a lot of direction, purpose and focus in life.
When you create a financial plan, you get a good deal of insight into your income and expenses. This helps you to track and cut down on unnecessary expenses, which automatically leads to enhanced savings in the long run. The other benefit of planning is that it helps you manage your money efficiently and enjoy peace of mind. With a realistic financial plan in place, one can be rest assured that they will most likely never be short on funds, especially during the golden years of retirement. It will also ensure that there is enough money for children’s higher education and marriage
The other key element of financial planning is getting an investor prepared to address uncertainties in life. It is in this regard where an emergency fund comes into play. No one can predict when things could go wrong in the form of a job loss or a family emergency. Having a financial kitty handy for such times takes off at least a part of the stress one stands to face. In effect, such an arrangement will help an individual be more confident to face life.
Attaining financial freedom is not a very difficult process. All you need to do is construct a viable financial plan, review it periodically and be very determined about achieving it. As Benjamin Franklin said, “If you fail to plan, you are planning to fail.” So make sure you have a sound financial plan made by an expert in place to achieve financial goals and leave nothing to luck.
Note: This article is authored by Sourabh Mahajan, Founder & Financial Coach, TrueWealth Solutions.
This is a partnered post.