A few weeks ago, I realized the need of financial planning. Despite the lack of vision for my path in life in almost all fields, a friend of mine made me recognize the need to have a financial plan for the long term.
So I took action but I wanted to share my learning. So in this series of article, I’ll aggregate my research on the different reasons why financial planning is essential.
In my mind, financial planning has always been associated with risk and restrain. It’s like being on a diet today and only seeing the results in a few years — what’s the point? However, the long-term picture brings another perspective.
Imagine you had to live for more than 10 years without any income — surviving with only what you had saved in the bank, plus whatever you could find under your mattress. Would that be possible?
This is a question most of us in Belgium will have to answer — we’re currently living longer than ever. The average Belgian is expected to live until 81 years old — which is 16 years after the current retirement age of 65.
This means that just putting money aside — either in the bank or in your couch pillow– probably won’t be enough to enable you to fight the troublesome devil of our modern-day economy — the inflation.
So… here is the first culprit — “Monsieur inflation”.
What is this inflation and why does it impact our daily live?
Inflation is the increase in the prices of goods and services over time. Inflation means that with each passing year, one euro buys less, and is therefore worth less. In other words, unless you’re earning interests, your savings will lose their value over time. For example, annual inflation of 2% would have reduced a third of the value of your cash in just 20 years — so if whatever you’ve saved is earning little or no interest, it will fall dramatically short of what you need when you retire.
The bad thing is that inflation doesn’t only have a risk of eroding the value of your retirement: if you had savings planned for a house, €10,000 would be worth only €9,000 after just five years of 2% annual inflation.
In summary, inflation is one of the reasons why financial planning is necessary, I’ll tackle the next ones in the following blog post.
Stay tuned and let me know your opinion on the matter!