Over the last few years, we often heard terms like financial planning, personal finance, investment management, retirement planning which have emerged as buzzwords of sorts. Newspapers, blogs, magazines, television channels and just about every one under the sun seem to be talking about the importance of financial planning. So what is financial planning; more importantly, why it is so important?
In simple words, Financial Planning (FP) is the process of meeting your life goals through the proper management of your finances. The process of financial planning should help you answer questions such as Where you are today, that is, your current personal balance sheet, where do you want to be tomorrow, that is, finances linked to your goals, and what you must do to get there, that is, what you must do to reach your goals.
The process involves gathering relevant financial information, setting life goals( such as children education, buying home, buying car) examining your current financial status and coming up with a strategy or plan for how you can meet your goals given your current situation and future plans.
Developing a financial plan needs a consideration of various factors. This includes client’s current financial status, their financial goals, any outstanding loan, investment instruments, insurance requirement, retirement corpus, inflation, risk profile, tax liability etc.
FP provides you with a method for organizing your financial future, so you can plan for the unforeseen. Organizing your finances empowers you to be independent and handle unpredictable events in your life. Successful personal financial planning is crucial for anyone who wishes to manage financial difficulties and accumulate wealth.
Coming to our main topic i.e. why it is important. Let us understand one by one.
1. It helps in increasing cash flow as well as monitoring the spending pattern. The cash flow is increased by undertaking measures such as tax planning, prudent spending and careful budgeting.
2. A proper financial estimate/plan that considers the income and expenditure of a person, helps in choosing the right investment policy. It enables the person to reach the set goals.
3. It helps gaining an understanding about the current financial position. Adjustments in an investment plan or evaluating a retirement scheme becomes easy for an individual with financial understanding.
4. Providing for your family’s financial security is an important part of the FP process. Having the proper insurance coverage and policies in place can provide peace of mind for you and your loved ones.
5. It helps you to achieve financial freedom.
6. To meet financial goals and obligation.