Life without personal financial planning is like skydiving without a parachute in place. Personal financial management is the bedrock upon which you can build a comfortable and secure life. Without financial plans, you run the risk of spending without any aims, saving without any goals in mind, and exhausting your earnings for no valid reason.
Financial plans do so much more than manage your income the one time. They not only help you manage your monthly income but also maximise it to its highest potential for a secure present and future.
7 Reasons Why You Need a Financial Plan
If you need more convincing for personal financial planning, here are seven reasons that will make you understand the need for financial planning.
Financial planning can work:
- To help you fix a budgeting system
One of the biggest enemies of earning income is aimless spending. When we don’t know where our money goes and cannot separate our needs from our wants, we can end up spending too much on unnecessary things. But personal financial planning can help you manage your income, track your spending, and develop a budgeting system that works for you and your family.
When you sit down and start to draw a financial map, you also realise what you want in life and begin to recognise your goals. You can envision the bigger picture and start moving to actionable ways to achieve that life.
- To save for the long run
Once you become aware of where your money goes and what you are spending on, you begin to identify and separate your absolute necessities from those things that are only your wants and desires. A financial plan is the first step towards incorporating healthy financial habits like saving and investing.
But saving money comes before growing and maximising it. A sound financial plan can assist you in figuring out the most profitable and secure ways to save. It can help you weigh your options and give you insight into managing money tips.
For instance, instead of putting your money into a static savings account, personal financial planning by yourself or with an advisor can help you find smarter ways of saving, like opening a recurring deposit or a mutual fund account.
- To invest and grow your money
If a financial plan can assist you in saving your money wisely, it can also direct you towards profitable investments aligned with your financial needs and goals. An all-encompassing financial plan can help you identify the investment avenues in line with your budget and requirements, your present needs and future goals, your family’s lifestyle, and far-off goals like retirement investment planning.
It can nudge you towards better and wiser asset allocation and help you manage and even cut your risks. A good financial plan will always guide you towards a balanced investment portfolio that has a diverse mix of debt, equity, and hybrid investment options instead of telling you to put all your eggs in one basket.
- To pick the ideal insurance type
A financial plan can help you pick the appropriate insurance type for you and your loved ones. It accounts for factors like inflation and the rising costs of living, healthcare, housing, vehicles, and more.
You would not know how much to keep aside for insurance plans and what type of insurance aligns with your budget and needs. A financial plan helps you identify what percentage of income to remove from your earnings and whether you need term insurance, savings insurance, vehicle insurance, unit-linked insurance, or any other type of life insurance cover.
- To have ample funds for emergencies
Without a financial plan in place, it can be tough to navigate unforeseen challenges and emergencies. Emergencies like medical emergencies, health/ lifestyle ailments, accidents, job loss, business loss, market volatility, and others do not come with a warning.
But with a financial plan, you would have already accounted for an unfortunate eventuality and had monetary safety nets in place. These include having savings that last for a minimum of six months to one year, having investments that multiply your money, and insurance that gets you through inflation and the cost of recovering from those emergencies.
- To manage any pending debts
The need for financial planning gets highlighted more when you have any pending loans and liabilities to clear. It would be nearly impossible to allocate and manage your monthly income towards existing loans and debts without a well-thought-out financial plan to guide you.
Those who don’t start personal financial planning often keep their money static. Paying off loans and interest without a growing income can drain your savings in a flash. But with a financial plan, you will already have figured out ways to keep your earnings safe and multiply them to generate profit. This, in turn, will help you clear existing debts.
- To have enough for retirement goals
Finally, personal financial planning can help you plan a stress-free retirement. Those who don’t start financial planning often don’t think of the long-term. This short-term approach can keep them working most of their lives and cause added stress.
A financial plan helps you realise that you need a retirement investment plan to lead a happy, independent, and comfortable life in your golden years. It does not let you compromise your lifestyle and ask your dependents for monetary support. It nudges you to act in the present to secure your future.
Building a financial plan is not a one-time thing. It is a process you must come back to frequently and something which you have to evaluate according to your changing needs. Going through life and achieving financial success is difficult, if not impossible, without an adaptable and realistic financial plan. You can also invest in a Tata AIA Life Insurance policy to save on taxes* and keep your loves ones financially secure.