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6 mins read . 05 Jan 2023
Most of us use the term financial planning loosely. Financial Planning is a comprehensive evaluation of an investor’s current and future financial status. It uses known variables to predict future cash flows, asset values and withdrawal plans. It gives structure and discipline to your finances. It is good to dream about a rosy future but to translate that into reality, you need a smart financial plan. Here are some striking benefits.
Your long-term future starts with where you stand today. Financial planning forces you to evaluate your inflows, outflows and debt in a very organized manner. In short, it provides a personal balance sheet, to begin with. You may be overleveraged or underinsured without even knowing it. Financial planning provides those granular answers. It helps you to identify if you are spending too much or saving too little. These may look like small issues, but over time they accumulate and make a big difference to your eventual wealth creation.
This is one of the stand-out features of financial planning. It ensures that you put your money to more efficient and also to more effective use. In other words, you get more rupees per rupee. The financial plan will help you answer questions like if you have an inflow what should you be doing? Should you repay your personal loan, cut credit card debt, take medical insurance, enhance life cover or save for a home loan margin? In short, financial planning helps you become financially more efficient by prioritizing your goals.
It is said that saving and investment are less of an activity and more of a habit and financial planning instils that habit. We normally look at savings as the surplus that is left after expenses. Financial planning forces you to start with target savings and then work backwards to reach what is deducted from your inflows. That way, you not only save to your full potential but also squeeze the maximum savings out of your income.
Most of us do not appreciate the importance of this factor, but it does matter a lot. Financial planning begins with insurance and gives you a comprehensive understanding of the risk to which you are exposed. One of the things that financial underlines are that planning itself is the best insurance against the uncertainties and vagaries of life. This resultant peace of mind may be intangible but is extremely valuable in helping you to plan your investments and secure the future of your family a lot better.
No financial plan is complete without planning your liquidity. Basically, you should have money when you want it and as much as needed. It is not just enough to invest in long-term assets for your retirement or for your children’s education. You also need to plan the drawdowns on a periodic basis and that is automatically built into your financial plan. Financial planning hits two birds with one stone. Investments are structured for enhancing growth and timing liquidity without impairing either of the goals.
Financial planning saves you from falling into a debt trap by taking a conservative approach to ensure debt levels do not impinge on financial solvency. The debt trap problem is resolved by a financial plan in 3 steps. It ensures that you are adequately insured, ensures that you have reduced your high-cost debt and finally it also ensures that there is a liquidity safety net to cover 4-5 months of expenses.
That is the bottom line. Plans are just plans if you don’t act, and a financial plan forces you to act. Financial planning is not just a statement of purpose but an action document. It forces you to act. Once you see your financial plan the first thing that strikes you is you cannot afford to wait. In other words, it just goads you into action.