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10 Reasons Why You Need A Financial Plan - Outside View by PersonalFN

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10 Reasons Why You Need A Financial Plan
Oct 31, 2017

Many may wonder - "Do I really need a financial plan?" Some feel that saving regularly in bank recurring deposits or Systematic Investment Plans (SIPs) of mutual funds does the job of allocating their savings to investments. However, ad hoc investments lead to inefficient utilisation of your financial resources.

In order to become rich, besides salary or business income, you need to make money work for you. This is where prudent financial planning and investing comes to your rescue. A financial plan enables you to construct a road map to achieve all the financial goals and helps to build your contingency fund for any unforeseen needs that may arise.

Let us first begin with understanding what a financial plan is and what it can do for you.

A financial plan ensures that you are well equipped to deal with dynamically changing circumstances at a personal level as well as a macro level. In the absence of a financial plan, you might not be empowered to accomplish what you have dreamt of achieving and might also be under-prepared to deal with contingencies.

Below are 10 reasons why a financial plan is much needed.

  1. Managing Cash Flows or Budgeting

    If you don't realise where and how your income is spent every month, then you definitely need to plan your finances better. Many people fail to understand how their monthly salaries get extinguished, leaving them with very little or absolutely nothing to save. Impulsive buying and lack of budgeting for expenses leads to many problems in the long run. Thus maintaining a budget is crucial to stay on track towards your long term financial goals, while you may achieve all the fancies of life in the short run.

  2. Efficiently Managing Debt

    Taking a loan does offer instant gratification. However, when the liabilities turn in to a debt trap, it's time you put your personal finances in order with a financial plan. Many often land up increasing our loans and borrowings through credit cards, overdraft facilities or personal loans. In most cases, these easy finance options result in damaging their financial health, leading them into a financial mess. A financial plan will not only help you to come out of this mess, but will also enable you to manage your cash flows better in order to achieve your other financial goals.

  3. Streamlining Your Investments

    If your investments are scattered and you are yourself unsure about where you have invested, then it's high time for you to put your portfolio in order. Many often indulge in investing in a haphazard manner without conducting a proper need based analysis or undertaking sufficient research on financial products. In most of the cases, tips from friends and families go about forming a portfolio, which may eventually leave an unsuitable portfolio for you. Also investing in an ad-hoc manner results in scattered investments which get difficult to manage / track. The investment portfolios of such investors are extremely strewn with duplicating schemes and investments that do not provide any advantage of diversification. Such investment portfolios need to be consolidated and re-aligned so as to meet your financial needs.

  4. Invest In The Right Financial Products

    Many people invest in the equity asset class through shares or mutual funds. However more often than not, as mentioned earlier, such investments are done on recommendations from friends and relatives and without taking into consideration one's financial goals and risk appetite. In most of the cases these unplanned and non-researched investments result in loss of the investors' money. Hence, it is extremely important that you invest only after considerable research has been undertaken on any investment proposition. Constructing a financial plan will enable you or your financial planner to review your portfolio (both equity and debt) and strike the right asset allocation to provide you with the best possible outcomes.

  5. Set The Right Asset Allocation

    Most people consider equity as the best investment option especially during a stock market rally. However, it is never wise to put all eggs in the same basket. It is vital for you to understand that not all assets move in the same direction at the same time. If equities are witnessing a bear market, it is unlikely that other asset classes such as gold, debt instruments and real estate will also be witnessing a down-turn at the same time or vice-versa. Hence, it is best to invest in more than one type of instrument to improve your chances of achieving your long-term goals with minimal turbulence. Hence, a suitable asset allocation for you can be devised through a financial plan that acts as a shield to protect your wealth during uncertain economic conditions and market volatility.

  6. Weeding Out Inefficient Financial Products

    Sometimes people land up taking multiple insurance policies such as Endowment, Money Back, ULIPs, Pension Plans etc. due to the incomplete knowledge or mis-selling of products through agents. Many a times, these policies do not solve the purpose of the insured and only result in filling the pockets of the agent who sold you that policy. Some policies which promise you a life cover plus returns (market linked) may fail to do both. More often than not, these policies provide a very low cover and also low returns due to the number of charges involved. A financial planner can help you understand which insurance policy suits you the best and which ones are best avoided.

  7. Calculating The Right Insurance Cover

    In case of unfortunate circumstances, the right amount of insurance can be a financial boon to you or your family members. While life insurance will ensure that your family members are able to maintain the same standard of living even in your absence, the right amount of health insurance cover can avoid burning a huge hole in your savings that mishaps or unforeseen tragic events could have created. However, many people do not understand how much life and medical cover they should take. A holistic financial plan will take into account your income, expenses and goals amongst host of other aspects to determine the optimal amount of cover both - your life and health insurance needs.

  8. Set SMART Financial Goals

    If you want to plan for financial goals such as buying your dream home, a car, a vacation abroad, child's education and their marriage needs and your retirement amongst host of others; prudent financial planning can come to your recourse. Through experience we can say that many vie for all the aforementioned goals, but lack of prudent financial planning and / or procrastination on executing the financial plan drawn, which in turn hinders accomplishment of financial goals set. So, it is imperative that a prudent financial plan is made, and is vigilantly and religiously followed so as to make your dreams come true.

  9. Inculcating A Regular Savings Habit

    To create wealth in the long-term, investing with discipline and determination is the key. Even a child needs discipline and regular monitoring to achieve his goal of being a good student. Hence, you too, need to invest regularly and wisely to meet your financial goals. Investing small amounts regularly will also prove to be light on your wallet and reduce the burden of defraying a huge amount from your bank account. With a financial plan in place, you can determine the amount that you would need to invest regularly to meet all your goals. You can establish the requisite corpus for meeting your financial goals through planned investments in the right investment avenues.

  10. A Blueprint To Your Long Term Goals

    If you don't have road map of how to achieve your dreams, a prudently drawn financial plan can be your blue print to meet all your financial goals while empowering you to deal with contingencies as well. Hence financial planning is for those who have unclear ideas or plans of how they would achieve their dreams and wishes in life.

Now that you have understood why financial planning is much needed, let's look at how you can create a simple financial with just few small steps.

Step 1: Fix your relationship with money

Sometimes we forget and ignore the small expenses like travel expenses, mobile bills, junk food habit, etc. which can cost you a fortune. On a daily basis, they look small but eventually can have a bearing on your long-term financial health.

You need to write down your expenses to understand where your hard-earned money is being spent. You will then understand whether you are spending frivolously or on items that are essential to your daily activities.Remember this worthy quote by legendary investor Warren Buffet: "If you buy things you do not need, soon you will have to sell things you need."

Hence, it is always the small little things that matter in the larger picture called life.

Step 2: Set clear definitions of your goals and execute a financial plan

Perhaps you'd agree that goal setting is the most important part for planning; it definitely plays a major role in financial planning as well. It is very important to define and classify your long-term and short-term financial goals in life.

By setting financial goals, you will be able to channelise your income into productive avenues. This will help prevent ad hoc purchases while remaining focussed on financial goals that are close to your heart.

To quote Waren Buffet, "Do not save what is left after spending; instead spend what is left after saving."

So, if you plan in advance, achieving your goals will become easier and the probability of achieving them will be high too.

Step 3: Save systematically to build your wealth over long term

To attain financial freedom, above all, you have to be patient. Wealth building is a gradual process. Your goals are probably looking pretty big once they have been quantified, as they should be. This kind of money takes years to build, and everybody starts small.

Investing regularly also helps in dealing with market volatility. To absorb the shocks of the volatile equity markets well, SIPs work better as opposed to one-time investing. This is because you typically buy more mutual fund units when prices are low, and buy fewer mutual units when prices are high. This enables you to lower the average cost of your investments.

Stick to your investment plan and within no time you'll be patting yourself on the back for achieving these goals, one at a time.

To Sum-up...

PersonalFN is of the view that everyone needs a financial plan, whether you earn Rs 20,000 per month or Rs 2 lakh per month. Please recognise that, achieving financial nirvana isn't as difficult as it is often made out to be. To get there, all one needs to do is, construct a viable financial plan and be determined about achieving it.

Many of you might not have the time and expertise to plan and execute your own financial plan, hence, it would be prudent to invest in the advice of an experienced financial planner who might help you to plan and manage your finances better. Answer this questionnaire to get an idea of where you stand with your own financial health and pinpoint areas where you may need more work.

You too, can create a financial plan like an expert by signing up for PersonalFN's comprehensive A to Z e-course This video e-Course will be your guide to most serious decisions regarding money matters.

Out of the eight modules, in Module #1 we start with the basics of budgeting and managing cash flows. In Module #2 of our video tutorials, we speak about how to set SMART goals. While in Module #4, we learn about how to select winning mutual funds, along with the right asset allocation and its importance. The module will also outline strategies to build your optimum investment portfolio and much more. You will learn the Ins and Outs of mutual funds and other personal finance topics. Read more about this e-course here.

Apart from the video tutorials, you will get access to a host of downloadable calculators, such as a Cash Flow Calculator, Retirement Calculator, etc, Absolutely Free! Don't miss this opportunity. Subscribe to the e-course now!

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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