Financial planning is an essential step that must be taken, in order to secure your financial well-being through time. At different life stages, you will require substantial amounts of wealth, not to mention, living an exuberant lifestyle on a budget. This is where financial planning comes in.
For instance, if you are planning to buy a car at age 25, a house at age 30, and get married at 32 years. These are substantial expenditures, for which you must plan accordingly.
Financial Planning is nothing but creating a well-chalked-out plan to meet your short-term, mid-term as well as long-term financial goals based on your asset allocation and risk profile. So, in order to do a proper financial plan, you also need to understand your risk-taking capacity, i.e. your risk profile and then determine your asset allocation. Thus, by creating a Financial Plan, you will be able to understand which product(s) is needed to help you achieve your future financial goals, keeping your current financial situation in mind.
Financial Planning is the difference between wish and goal. If you only “wish” for something but do not create a well-chalked-out plan for the same, your chances of achieving the remains a dream. However, if you pen your “goals” out and then plan backwards, it is much easier to achieve the same.
Let us take a look at the top 10 reasons why you absolutely need financial planning:
- It assists in increasing your Net worth:
Your net worth is calculated as follows:
Total assets – Total liabilities = Net worth
Your net worth is a critical determinant in your financial planning. It helps you to see your current situation of assets and liabilities.
Pro Tip: Trust me liabilities are good. It only helps you build your assets faster.
Building your net worth is a financial goal, which helps you achieve other paraphernalia financial goals in the journey.
With proper financial planning, you can easily repay your loans and liabilities and then contribute more towards increasing your net worth.
- Inflation, the elephant in the room:
Inflation is something that most people technically understand but fail to incorporate into their proper financial planning. If the monthly grocery cost of your household was Rs 10,000 some years ago but has gone up to Rs 50,000 without much rise in lifestyle, this is inflation. It has multiple components like medical inflation, education inflation, lifestyle inflation, etc. other than what is portrayed in the actual figures.
So, basically, inflation is a bigger elephant in the room than we understand. In fact, it is like an iceberg, where you can only see the tip. Inflation also has a compounding effect. For example, if the cost of engineering from a premier college in India is Rs 18 lakhs per annum now, it would be tantamount to approximately Rs 40 lakhs after 12 years at 7% inflation.
Pro Tip: Inflation is one of the most important aspects of consideration in your financial plan, which a certified planner would help you to create. Without incorporating inflation, your financial plan is not foolproof.
- Contingency planning:
The global pandemic in 2020 has proved beyond measure the very importance of contingency planning. Emergencies can arise at any moment in life. It can be a crisis at work, a medical emergency, a financial obstruction, etc. This cushions the setback and helps you get back on your feet.
Pro Tip: Having a minimum of 6 months of monthly expenses in your liquid asset is one of the keys to Financial Planning. The job situation, income opportunities, etc. might just change overnight and without a backup plan or a safety net, it becomes very difficult to achieve your financial goals in the future.
- Retirement Planning:
Retirement planning is the most important financial goal and yet often overlooked. Most people fail to realize that retirement is not something of the distant future only. There may be a requirement to retire early in life, like starting up something of your own. Also, with inflation, retirement expenses can become an avalanche if not planned ahead of time.
Pro Tip: There are many components of retirement planning other than post-retirement cash-flow management like health insurance, post-retirement tax planning, etc. as well. If retirement is carefully planned, it solves 50% of the financial planning woes as retirement is the Achilles Heel.
For example, your monthly expenses now are Rs 50,000 to maintain a particular lifestyle at 25 years of age. With the same lifestyle, at 5% inflation, your post-retirement monthly expenditure would be Rs 2.75 lakhs without considering your rise in lifestyle, medical expenses, etc.
So, if you start planning your retirement at 25 years of age, your monthly investment would be significantly lower than if you start at 40 years of age. This is purely because of the power of compounding, which is by far the MOST powerful financial planning concept that can be utilized.
- Luxury planning: It helps in guilt-free indulgences
You may have plans for an exotic vacation in Switzerland with your family, or buying your dream house. This could become a part of your mid-term financial goals. Buying the top-model SUV or the latest Bose headphones could be a short-term goal and a part of your indulgence planning. All of this could become a part of your financial plan and be well executed.\
In fact, with financial planning, you can invest money in luxuries such as buying a beautiful house or an expensive car, etc. and these would help you to improve your standard of living and contribute towards accumulating assets. Since financial planning helps you plan ahead, these expenses won’t seem like a lot.
