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‘Success is the residue of planning’- by Benjamin Franklin.
The above quote shows the importance of planning in achieving success in each task. Similarly financial planning is important to achieve our financial goals.
In this module, we will learn about financial planning and its importance. Not only that, we will discuss how to plan for each stage of our life and become financially independent. So, without any further ado, let us start:
What is Financial Planning and Why do we Need it?
An earning person is faced by different types of expenses in their daily lives.
Some may be expected and accounted for - rent, school/college fees, or household expenses - whereas some may be completely unexpected, like expenses for a medical emergency.
Along with such expenses, we will have to start saving money for our retirement as well.
It would be perfect if we could set out a way to handle all these obligations and expenses while maintaining good standards of living.
Unfortunately, two circumstances prevent this from happening -
Something that costs you ₹100 today, could cost you ₹110 tomorrow. Let us discuss an example to bring out the point.
Suppose a situation in which, your monthly household expenses = ₹30,000;
Years to Retirement = 15;
Inflation Rate = 8% p.a.
The household expenses you will have to incur at the time of retirement to maintain the same lifestyle = ₹95,165 per month.
ii. Improper Investment of Money
The lack of proper research and planning before making our investments can kill the benefits its future value can give us.
To prevent these circumstances from harming our financial well-being, we need a proper road-map of how to spend and save money.
This process of developing a plan of spending and saving in such a way that we can maintain our standards of living while covering our expenses is 'financial planning'.
The process of financial planning involves -
1. Determining our risk-profile
2. Quantifying our goals
3. Tracking our incomes and expenses
4. Setting our goals
5. Monitoring our progress towards our goals
The process of financial planning is important for us to follow because it helps us manage our needs and wants.
While needs are things we cannot live without, wants are simply objects we wish to acquire in the future.
Financial planning helps us manage both of them efficiently, while making sure our standards of living are maintained.