Today, the best way to begin your financial journey is through a financial plan. But, what exactly is a financial plan and what is the process that financial planning entails? As the very name suggests, it entails planning and therefore it is futuristic. Secondly, it is financial which means it translates and expresses everything in monetary terms. Let us now look at a more chiselled definition of Financial planning…
Financial Planning is a comprehensive evaluation of an investor’s current and future financial state by using currently known variables to predict future cash flows, asset values and withdrawal plans. So, in a nutshell, financial planning gives a structure and discipline to your finances. We all dream of a bright and rosy future but then each of our long term needs have a financial implication and therefore the only way to achieve your long term goals is to plan for them. The earlier you start your financial planning process the better; and therefore the time to start is now!
What are the key benefits of Financial Planning?
There are 10 distinct benefits in Financial Planning; while some of the benefits are immediately visible, some benefits are not immediately apparent. Here are some key advantages of financial planning…
- Financial planning enables a more granular understanding of your financial position. We normally treat our inflows, outflows and debt in a very intuitive manner. Financial planning focuses us on understanding our personal balance sheet closely and the financial implications of the same. Many a times, most of us tend to be over-leveraged but never tend to realize it.
- Since Financial planning results in a granular understanding of our finances, it helps us to bridge many a gap in our finances. For example, you may be spending too much each month on entertainment expenses. Alternatively, you may not be saving money to your true potential. Financial planning helps iron out these smaller points.
- Thanks to financial planning, you are able to put your money to more efficient use. In other words you get more rupees per rupee. If you have an inflow then what should you do? Should your repay your personal loan, downsize your credit card, take an insurance policy or save for the home loan margin. Financial planning has the answers.
- Financial planning enforces the discipline of savings. Many of us tend to look at savings as the surplus that is left after your expenses are deducted from your inflows. That is not too scientific. A better approach would be to set your target savings per month and then work your expenditure around it. The answer is to start with the target and work backwards. Financial planning empowers you to do that!
- Financial planning normally begins with insurance and therefore it gives you a comprehensive understanding of the risk that you are exposed to. It is quite normal for us to under-insure or depend too much on endowments rather than on pure risk policies. Financial planning gives you a better understanding of your risk profile.
- The best insurance against the uncertainties and vagaries of life is planning and it is financial planning that gives you peace of mind. When you are confident that your future and the future of your family is secure with adequate insurance and investment growth, it allows you to better focus on your career and business. This peace of mind may be intangible but is extremely valuable. Peace of mind is an important pillar for you and for your family!
- Financial planning ensures that you have money when you want it and as much as is required. Your long term goals like retirement and children’s education need to strike a fine balance between growth of capital and regular liquidity needs. Financial planning gives you the flexibility to hit two birds with one stone. It ensures that investments are structured in such a way that you get growth and liquidity timing at the same time.
- Financial planning ensures that you avoid the risk of falling into a debt trap. Typically, you get into a debt trap when you borrow more than you can afford to service in the long term. Financial planning always takes a conservative approach to ensure that your debt levels do not impinge on your financial solvency.
- Financial Planning helps a create safety net for the future. What exactly is a safety net? A safety net needs to ensure that your limited resources grow at the best rate possible within your risk parameters. The biggest risk is not taking risk and that is addressed by financial planning. It ensures that your long term financial goals are matched with more risky assets with greater return potential.
- Financial planning forces you to act. This is perhaps the least appreciated benefit of financial planning. In any long term venture there is the risk of lethargy overtaking you. The beauty of financial planning is that it is not just a statement of purpose but it is an action document. It forces you to act. Once you see your financial plan the first thing that strikes you is that you cannot afford to wait. That is, perhaps, the most important advantage of starting out with a formal financial planning.
Remember, financial planning is about bringing structure and discipline to your finances. If you are serious about your financial future, there is really no alternative to financial planning. The time to start is now!