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Chapter 4.6: Why should you make a financial plan?
There are many advantages of financial planning which can have far reaching positive effects on one's life.
Here are some reasons why a comprehensive financial plan is important:
Safety net for the future:
Financial planning helps give a direction to your financial decisions. It helps you decide various investments that can bail you out of your financial problems.
For example, investing in various funds may help you repay the loan or save enough for your retirement. Once your financial goals are set, it helps make your life more secure and flexible for any financial emergency situation that may arise. Financial planning thus acts as a safety net for the future.
Financial planning takes stock of your present as well as your future. It thus facilitates decision-making. Take the above example, if you had a proper financial plan in place, you would never be short of funds for your daughter’s marriage or for buying your car.
Thus, you would not take any wrong decisions that would affect your financial well-being. This is why financial planning is the key to success, as it provides a direction for your decisions.
Always be prepared:
Suppose you save 5% of your salary or Rs 10,000 every month. Suppose your after-tax savings consist of Rs 1 lakh. You are saving this to buy your own car three years later. What if a sudden medical emergency crops you, and wipes out your savings? Not only does it affect your wealth, but it could also fall short in an extreme case. Marriage plans of your only daughter?
Let's borrow some money from the retirement fund. There goes the trip to Egypt you have been planning all those years! Financial planning will come to your rescue here. It takes into account all your needs and goals, and helps you be ready for any eventuality.
Optimum use of resources:
A financial plan also helps you form a strategy. This helps you allocate your resources to different assets.
Thus, you use your money more wisely, leading to optimization of resources.
Better standard of living:
With a realistic financial plan in place, you will never be short of funds. Liquidity will rarely be tight. All those month-end woes? Forget about them.
Thus, you can achieve your goals without compromising your standard of living.
It is very common to spend more than what you earn. Many facilities like credit cards, ‘buy now, pay later’ schemes, installment services and so on, compel you to overlook finances or spend more than necessary. At the end of the month, when the bills keep pouring in your mail boxes, you find yourselves in a sticky situation.
The mounting bills only take you further away from your long-term dream of owning your own house. If you start planning early, you can get out of whole a lot of financial mess arising later in life. Financial planning thus helps infuse discipline in your life.
Financial planning if often undertaken with the help of an expert. It is wise to seek expert advice from professionals. If not, you could end up with poor financial information and decisions that can prove disastrous. In the case of the working individual, insufficient or random saving for retirement can lead to a poorer lifestyle later.
Similarly, in the case of the businessman, poorly managed tax preparation could culminate in unexpected debt and a loss of carefully accumulated wealth.
Now that we have understood the basics of financial planning and its importance, let’s move on to the actual execution of a financial plan. In the next section, we will look at how to form a financial plan. Click here
Why Capital gains report?
- Snapshot of profit/loss
- Reflects performance of your portfolio
- Helps compute taxes
Know the power of compounding