Financial Planning is a process, which involves three key things: assessing where you stand financially, defining your personal financial goals, and creating a plan to achieve those goals. Let’s learn about the importance of financial planning in detail.
Objectives of Financial Planning
- Ensure availability of funds whenever required to achieve short-term as well as long-term requirements.
- Estimate the time and source of funds, which means delivering funds at the right place, at the right time.
- Ensure flexibility as per the changing conditions.
- Ensure optimum use of money.
Read more: 10 Steps in the Financial Planning Process
Financial Planning Importance
- It provides direction to your goals or dreams.
- It helps you plan for the future.
- It makes you disciplined towards money.
- It encourages you to manage inflation.
- It gives you peace of mind, knowing that your finances are sorted.
Read more: 15 Financial Planning Tips for Beginners
Importance of Financial Planning – Top 10 Golden Rules
Rule 1. Save Money
You needn’t have a financial background to manage money. All you need is commitment. The first step towards money management is deciding to save. Saving money helps you achieve financial independence.
Rule 2: Make a Budget
If you find yourself having a cash crunch much before the month ends, then it’s likely that you are living beyond your means. Make a budget to monitor your expenses. A budget will track your income inflow and outflow every month.
Rule 3: Cut Expenses
After you’ve created a basic budget, you’ll understand where you spend your money and where you can cut costs. For some, it can be as simple as cutting down small expenses that add up. For others, it could be making deeper cuts in their spending to widen the gap between income inflow and outflow.
Rule 4. Maintain a Personal Balance Sheet
A balance sheet is a place where you can list down your assets and your liabilities. You then get a clear picture of what you own and what you owe. To get started, list down your assets (bank balance, the value of your assets, investments, home, etc.). Total up the value of your assets. Then list down all your liabilities (car loan, home loan, credit card debt, etc.). Total up the value of all liabilities. The difference between the value of your assets and your liabilities is your net worth.
Rule 5: Build Emergency Funds
You need to set up a separate account for emergencies. This account needs to have at least 3-6 months of living expenses, which can be easily accessed when an emergency strikes.
Rule 6: Create Your Personal Investment Portfolio
Constructing your first investment portfolio is your first step toward wealth accumulation.
Don’t put all your money into just one type of investment. Your investment portfolio needs to be a mix of different types of asset classes; so, distribute your investments across various asset classes like equity, debt, and cash. This is called asset allocation.
Rule 7: Be Smart about Debt Management
Debt management can be tricky; it can eat up a major chunk of your paycheck. You may also end up borrowing new debt to pay off the old ones. This can spiral out of control, making you fall into the vicious debt trap. The wise way to get out of debt is to handle it strategically. Start paying the expensive debt first. Pay off your credit card balances in full every month. If you have a lot of debt to shoulder, and your salary isn’t enough to make those high-interest payments, consider taking a low-interest loan for debt consolidation.
Rule 8: Get Insurance to Secure Your Family & Finances
You have worked hard to save and invest your money, so it needs to be protected. Any untoward incident can leave you in financial ruin if you aren’t adequately insured. So, get the insurance that protects your ability to earn, your life, and keeps a roof over your head. Life insurance, health insurance, short-term disability insurance, and homeowner’s insurance are some types of insurance you can consider.
Rule 9: Plan for Retirement
Life expectancy has increased, and therefore it has become all the more important to plan retirement than it was a few decades ago. Plan for your retirement early: start saving and invest in retirement plans that can help you live a comfortable life in retirement.
Rule 10: Take Caution and Be Alert
A good financial plan allows you to invest right and make your money grow. But, you need to take care that your hard-earned money is not lost to sheer ignorance, identity theft, and fraud. Be aware and take caution if you want to gain more and lose less in this ever-fluctuating financial market.
