Saturday, 25 February 2017

Importance of Financial Planning and the Steps Involved in it

Financial planning is an ongoing process. It helps you take the right decisions about money, so that you achieve your financial goals. It is not just about buying financial products. Financial planning is very similar to planning for your health. Let us see you want to reduce weight, so you checks what is your current weight, how much you want to loose, what are the exercise options which tempt to join and then you hire a personal trainer. Then you create a plan out of it and then track it. Financial Planning is also like this, first you understand your current financial status, you write down your goals, you look at the investment options available, you select the right investment options for you and make a plan out of it and you implement the plan and review it periodically. What you just saw are the exact steps of financial planning.


Why is a Financial Plan Important?

Do you remember the price of Mango bite or Panpasand you used to eat? it was just 25 paise, but today it costs rupee 1. 

Have you noticed the decreasing amount of chips in your 10 rupee potato chips pack? all of this is inflation, steady increase in the prices of goods and services. Now, as these prices go up, so does the cost of our future goals. If today it costs rupees 25 lakhs for higher education abroad, it would cost 73.4 lakhs rupees when you get grows up after 16 years. If the inflation is at 7%. Inflation has a compounding effect similar to compound interest. So the impact of inflation is the first reason why financial planning becomes more important. The next reason why financial planning is important is contingency fund availability. You may never know when the job scenario turns gloomy, the earlier hikes are also not in line with the prevailing inflation and so planning becomes of at most importance.

With unexpected medical instances on the rise and you might have elderly parents in the house. It calls for keeping contingency fund ready for such situations. The main rule suggests, keeping six months salary in highly liquid form for this reason. So financial planning takes into account not just your long term goals but also your short term needs. 


Another reason for financial planning is retiring, like our parents generation, we may not be supported by any pension structure and so planning for retirement is a crucial aspect. With life expectancy on the rise it becomes all the more important that you plan your retirement. You would need a retirement corpus of 5.2 Cr if your monthly expenses of 50,000 rupees. Your current age is 32, you want to retire at 55 and you may live till 80 years, if inflation was at 7%. This shows how retirement planning is important and financial planning helps you do the same.

Next we can see about insurances, financial planning helps you know your true worth which intern helps you access your insurance needs which shields your family from any financial loss in case you lose your life or in case of your serious medical condition. This gives you a sense of security as you are adequately covered.

When you do financial planning, your investments are tied to your goals. Your each and every money decision impacts your financial planning so when you do your tax planning or you buy insurances you keep them in line with your financial plan. It keeps you away from any ad-hoc investments and you do your tax planning well in advance inline which your financial plan.

Financial Planning helps you manage your cash flow, that is your inflows and outflows. You manage them in such a way that you utilize your resources in the best possible way to achieve your goals. It helps you cut out any unnecessary expenses and gives you a very strong hold over your financial situation. +And the last is you achieve your financial goals comfortably. As it started early and you have the right plan to meet your goals.