Importance of financial planning

As it is rightly said, failing to plan means planning to fail. When it comes to money, there are enough variables and factors that can affect your financial life so planning your finances needs to be concrete. Achieving your financial goals and streamlining your overall personal finance along with improving the standard of living depends on the financial plan you have. So, following are the factors which help you to understand why it is important to have a financial plan.

Inflation
Inflation is a risk that is unavoidable. However to overcome this risk you need to formulate a financial strategy which would generate cashflows such that you are always able to maintain inflows that are more than your outflows. What inflation does is it reduces your purchasing power. Say for instance you used to travel by bus from point A to point B 10 years back and you paid Rs. 10, but now for the same route, you may be paying Rs. 20. It is to be remembered that you cannot generalise inflation; education would have different inflation rate than say flight tickets. So, financial planning takes inflation into consideration while formulating your personal finance strategy which not only helps you in the pre-retirement stage of life but also after retirement.

Emergencies
Emergencies are something which occurs without prior notice and if you are not prepared for the same then you may have to take a loan for it of need to break investments that were dedicated towards your future needs like child’s education, etc. A financial plan helps you derive the required corpus to be maintained and how to build it. After streamlining the cashflows, making provisions for emergencies is the next step in a financial plan. So, its importance is way more than that of other financial goals.

Risk Management
This is something which many people ignore while focusing on earning returns. What would be the use of earning more returns if those returns are not going to get used for the desired purpose? Say, for instance, you invested for your child’s education and it is growing at the highest rate possible, but say you fall prey to some critical illness or you met with an accident and need to get hospitalised and you don’t have dedicated health or critical illness insurance. This will lead you to use all your current savings and if not sufficient then also would lead to the sale of the high returns earning investments that were dedicated towards your child’s education. So, to avoid this you will have to plan your risks, managed them well through a financial plan. In a financial plan, you would get to know how much and which type of insurance would be required and how much premium you need to pay for the same. This is the third step after the emergency fund.

Financial Goals
But of course, financial plan not just takes into account above things but also your financial goals such as your child’s education and marriage, your retirement, or you wish to buy your dream car, etc. While planning for your financial goals, inflation, goal tenure, your risk profile, etc. are considered and based on that, how much investment is required and where is derived. However, it is to be understood that if you are only concentrating on financial goals then that is not known as financial planning but it is known as goal planning as your major focus is on financial goals and not on overall personal finance.