13 reasons why, you need to create a financial plan today
Why do you need to create a financial plan?
From planning your retirement to spending on your children’s education or that long awaited foreign vacation, you need money for any expense. About 70% of the people have no idea how much they need to save for the many, many expenses they will incur in the coming years and how much they need to stop working full time in a job. We often see people we know unable to meet their goals or dreams because they did not plan their financial future properly and that’s exactly why you need a personal financial plan.
Here are 13 reason why a financial plan is needed.
- Financial understanding: When we make a financial plan, we also go through all the aspects of it. This leads to greater financial understanding and financial literacy over time. Financial planning provides fresh insights into your budget and improves control of your finances. Remember knowledge is power.
- Managing your money: When you create a financial plan, you have much better control on how to manage your money and meet your goals. If you don’t manage your income properly it is easy to overspend even with high amounts of income.
Parkinson’s law when applied to finance states that as income rises so do expenses to meet it. This is the reason most people stay poor. Proper money management and budgeting is needed to ensure that your expenses do not rise as rapidly as your income. This will ultimately ensure that you become financially independent.
3. Set goals and work to achieve them: Having goals allows us to set targets for ourselves instead of spending and saving aimlessly. You might want to retire early or wealthy, travel abroad, buy a luxury car, save for your child’s marriage. Working towards a goal focusses, motivates and keeps us engaged.
4. Budgeting and cash flow: A budget and cash flow are the basics of creating a financial plan. They allow us to understand month on month what the income and expenses are. This essentially leads to understanding of cash flow. A positive cash flow helps us have more income in hand to invest and have a better life. Creating a budget and sticking to it helps you avoid many of the spending mistakes on luxury items which ultimately reduce your wealth.
5. Controlling expenses: A budget and financial goals give us better knowledge of our spending capability on expenses. You could choose to cut back on couple of dinners outside your home every month or you could skip the expensive cab ride home. You can have an easier time cutting back on unnecessary expenses if you are better aware of your finances.
6. Saving and investing wisely: A financial plan will make you think clearly about how much you are saving and whether you will be able to meet your goals. Better tax planning will also help you save more. You should also aim to get a thorough understanding of the returns offered by various investments and the risks associated with them. We might want to take more risks when we are younger for higher returns. But, we also need to reduce our risks as we grow older. You will also be able to understand the impact inflation has on your mid and long-term goals.
7. Making informed decisions: A better financial understanding and knowledge of budget and expenses allow us to make more informed decisions about where money should be spent and how it should be saved. For example, if both the husband and wife are working, hiring a cook is expensive. But, it might just end up saving twice as much in expenses on food from outside since the family is too tired to cook.
8. Retirement planning: It is never too early to start planning for your retirement. The earlier you start saving the more you will have during your retirement as the power of compounding kicks in. Understanding your contributions to PF, VPF and NPS etc. along with investment in endowment policies and creating an appropriate plan is essential to a well-funded retired life.
9. Getting out of debt: These days taking a loan has been made so quick and simple that it is frighteningly easy to take a loan and overextend yourself. We frequently take loans to buy items that could have been put off by a few months. You need to be able to avoid unnecessary loans and clear off all debt credit card, personal, car or otherwise. Of course, there are some investments which are also financed by debt. This debt could be good but more on that in other posts. With a proper plan and financial literacy, you will be able to make informed decisions about whether to invest in a new flat or shares or pay off that lingering credit card loan.
10. Planning your estate: Even if you just have some savings and a vehicle you have an estate. It is your responsibility to your family to make the right allocation of assets to them to help them in their life. People often think that estate planning and Will creation is only for the wealthy but that not right. It is for everyone. You should work with a good lawyer to list your assets and liabilities and assign them appropriately.
11. Financial security: Every one wants a financially secure future. They long to feel safe and not depend on outside agencies (job / business) for their expenses. No one wants their near and dear to suffer due to lack of money when they are gone, so you must plan your insurance needs. In these days of high medical costs, you must also plan for health emergencies and have adequate insurance to take care of your family. You will learn not to confuse returns from ULIP and LIC with insurance.
12. Plan for the unexpected: You must also plan to protect your investments and growth that you have achieved so far. An emergency fund allows you a safety margin when things go wrong like loss of job, recession or a baby.
13. Raises standard of living: The more you save and the better you invest the more you will have over the long term and be able to afford a better quality of life for your family. You will be able to balance between lifestyle and saving to meet your goals in the long term.
Financial planning isn’t rocket science. Understanding your finances will lead to a financially stable and secure future. You will be able to reduce your debt, invest better to achieve higher returns and also make more informed decisions.
