Importance of Financial Planning

Most of us earn and just save or invest in some financial products without having a clear plan and a goal or we may rush and invest at the close of the financial year to save some tax. Here I like to highlight the importance of financial planning for each one of us in order to achieve some of the important goals in our life like income protection, child education, child marriage, buying our own house, car, plan for a vacation abroad or make provision to meet the ever increasing medical expenses, or just to lead a good retired life with the same standard of living as we had during our working years.

What is financial planning? To put it simple it’s just planning your finances. You plan your Investments in such a way which meets your financial goals over time. You must be very disciplined when you do this, you must know from where the money is going to come to you and how are you going to save or invest it, and in future how are you going to achieve your goals.

Financial Planning is deciding a road map for yourself and deciding in advance how you will invest your money which helps you achieve your Financial Goals in life comfortably. Financial Planning will give you a Path on which you just have to walk overtime because you have decided and planned everything in advance. Financial Planning is about Consistency. It’s about having a vision. It’s about promise to yourself that you will follow the plan with discipline. Its not about getting 30% or 40% return, it’s about getting X% which will help you achieve your goals easy enough without compromising and exposing you to unnecessary risk.

Let’s take a scenario: You need Rs.10 lacs each for your daughter education and son marriage and also you plan to accumulate a corpus of Rs.50 lacs before you retire from active life. For this to be achieved you can invest in a variety of instruments which will give different returns based on the type of asset class (eg. Equity, debt, gold, real estate, etc) you have chosen. Here I have assumed 12% return which we can get from equities. Returns will depend on the asset class one invest which again varies from individual to individual based on the risk appetite of that individual. Based on the years left to reach the goal and estimated inflation we can calculate the investment we need to make every month in order to reach the goal.

 Sample Illustration:

I would conclude this by repeating the same point that Financial Planning is not at all about getting great returns or beating your friend’s portfolio performance or doing better than average. It’s a personal thing and totally relevant to you and to your needs and your Financial Goals. Its about having a predetermined plan or strategy to make use of whatever money you have in a hassle free way. Getting great returns or doing just better than average is not a very significant part of Financial Planning.