Every financial decision in your life should be based on some goal. The financial goal can be building a retirement nest egg, saving for your childrens college education or their wedding, saving for a down-payment for property purchase, protecting your family from financial distress due to unforeseen risks, protecting your family from health risks, protecting your home or business from fire or other hazards., planning a foreign trip etc, but unless you have an investment objective, you will not be able to make the right decisions. Financial planning, whether formal or informal, is a process where youÂ define your goals in quantitative termsÂ and then, formulate a plan which will help you meet all the different financial goals at different stages in your life.
What is Financial Planning?
Financial planning is no different from a structured problem solving framework. Every structured business problem solving exercises has specific steps (the same can be applied in financial planning as well). However, there are broadly 6 steps in the financial planning process. Most certified financial planners (CFPs) and financial advisers will be very familiar with these steps. However, investors should understand that, while financial planners or CFPs can play an important role in the financial planning process, the success of the financial plan ultimately depends on the investor. Therefore, it will be useful for investors to familiarize themselves with the process, so that they can work efficiently and effectively with their financial planners or advisers.
What are the benefits of Financial Planning?
There are many benefits of having a financial plan. Once you have defined the specific goals and save or invest for it, you actually start a journey which helps you reach your financial goals. A financial plan actually helps you lead a disciplined and stress free life so that you can enjoy the life to the fullest. We will now discuss the various benefits of having a financial Plan.
Aware About Financail Goals
The first step of financial planning is toÂ define specific goals. The more specific the goals are the better. As an investor, especially if you are young, you may not have enough clarity about all the financial goals in your life. This is where an expert financial planner helps you. Through a financial planning process, the biggest benefit is that you can define the goals across your savings and investment lifecycle and save towards it for achieving the different life goals. Investing or saving without knowing the goals is like embarking on a journey without knowing the destination.
Empahsis on Budgeting
The next benefit of financial planning is budgeting. This is probably the most important step of financial planning, but also the most ignored one. Even if you have the most detailed and well-structured financial plan, if you are not able to save enough, you will not be able to meet your financial goals. Saving habits are very personal, depending on your lifestyle, relative to your income levels.
While the financial planner may not actually prepare your budget, he or she can help you give you guidance on how to prepare one. Budgeting is not a hugely time consuming exercise. While preparing your budget, you should try, as much as possible, not to skip minor details, because through a careful budgeting you may be able to identify expenses, which you can easily reduce, without any noticeable impact on your lifestyle.
Remember, through budgeting even if you can make a small additional savings. It will have a big difference to your long term wealth as power of compounding helps over long term. Just to give you an example, even an additional Rs 500 monthly savings, invested in equity assets yielding 20% return, will generate a corpus in excess of 1 Crore over 30 years. Therefore, financial plan teaches you the importance of budgeting and helps you save more.
Know Your Risk
Having a financial plan helps you prepare forÂ risks. Risks are unforeseen events that can cause financial distress. The worst case contingency is an untimely death, which can result in financial distress for the family, apart from the emotional trauma. Financial planning can help us prepare for such contingencies through adequateÂ life insurance. Another contingency is serious illness that can have an impact on your savings and consequently your short term or long term financial objectives. A good financial plan will make adequate provisions forÂ health insurance and critical illness. There can also be otherÂ contingenciesÂ like temporary loss of income or major unforeseen expenditures. Financial plans helps you prepare for such contingencies.