No financial planning means bigger financial risks

Identifying proper financial goals and planning to achieve them in a systematic way is the heart of financial planning. Without a proper chalked out financial plan, there are a lot of risks. Often we find people without a proper retirement corpus and no money to bank upon because they haven’t planned for it in advance.

Not understanding the risk profile is another major drawback that a person faces if he hasn’t done proper financial planning. Imagine a retired person putting all his savings into a high risk mutual fund in anticipation for a high return, and loosing a major chunk of his hard earned money. At a time when he required a steady, stable income, he has simply wiped out his savings. Financial planning reduces the risks of loss by removing impulsive decisions through a seasoned and planned financial advice.

Besides planning for emergency, understanding the investment strategies and risk profiles, a financial plan helps you prepare for major events of life. Be it a marriage, buying a car, or a dream vacation, or buying a house, planning for kids education, daughter’s marriage all can be planned and executed in a desired manner with a well laid out financial plan.

Life often throws unexpected surprises like a divorce (which no one even dreams of when one marries) or a sudden lay off (which might mean a new job hunting and supporting the family or self for the entire jobless period). Tackling all these require prudent financial planning.

Another major expenditure, which is often ignored by parents, is the cost of educating their kids. The cost of education is increasing by each passing year and the desire to be in the forefront demands a good education. Can you imagine what a good schooling, good college, coupled with a foreign degree will cost? We are talking in Lakhs of Rupees here. If you don’t start saving for your kid’s education at early stages, chances are good that you’ll feel the cash crunch when the time comes.

Lifestyle changes as one grows in his or her life. The two bedroom house that you have now might be insufficient five years from now when you have two kids. Similarly, a long vacation every year might become inevitable. A bigger and more luxurious car might be required to complement your lifestyle as you shift into a plusher house. All this would require financial inputs at different stages of life, and being prepared beforehand will always help.

Financial planning: It pays to start right

Contrary to popular perception, financial planning involves much more than mere budgeting and is definitely an exercise which requires expert attention. Given the immense complexities of life, a complex financial marketplace, multifarious investment instruments, multiple short term and long terms financial goals, planning for a safe and worry free financial future is not an easy job.

There are many steps that go into the making of an efficient and truly effective financial plan. Proper goal setting and assessing one’s correct net worth are two of the most important principles of any financial planning process.

The first step is often the identification of the short and long term financial goals. One thing that should be kept in mind while deciding on financial goals is that the more tangible and precise the goals, the easier it is to plan for them.

Short term goals can be the things that you want to accomplish within a shorter time span say 3-5 years, like buying a car or a vacation etc. The long term goals have to be achieved over a period of 10 to 20 years or more like planning for daughter’s marriage, kids education, retirement planning, buying a house etc.

Assigning priorities to goals is another major thing that one should not overlook. Privatization of your goals will help you allocate your valuable financial resources in a way that is most profitable and allows you to accomplish the more important ones. For example, if you owe a huge credit card bill, it should be one of your priorities to get rid of this high interest debt before going on a vacation.

After the process of goal setting has been done, one needs to assess his current situation and get an accurate estimate of his or her existing net worth. This will require the listing of all the assets and liabilities one owes. Assets can be your bank balance, investment in stocks, mutual funds, gold, property, insurances, vehicles etc. And liabilities are the loans to repay (they could be home loan, personal loan, credit card debt, car loan).

Begin by estimating the value of your entire assets. The next step is to get an idea of the debts or liabilities you owe and subtract your liabilities from your assets. This will help you arrive at your net worth.

This exercise will give you a clear picture of what you have and what you owe. As a first step towards correcting the financial situation it is always better to get rid of costly debts such as credit card bills, personal loans, car loans etc. as soon as possible.

Why do we need financial planning?

There are at many reasons that necessitate the need for financial planning in every body’s life. Listed below are some of these, which will help you understand the importance of a good financial plan.

Prepare for financial emergencies

Life is full of testing times, and in almost every such situation having sound finances really help. Critical illness, accidents, death etc. limit or reduce our earning abilities. Having a corpus will help eliminate the pains associated with these emergencies to a great extent.

Get rid of debt

A good financial plan has a detailed cash flow analysis and takes into account the income, expenditure, life’s goals, and net worth. And if you have any debts, they are also taken care of. Good financial planning will help you eliminate high cost debts like credit card and personal loans as soon as possible.

Proper retirement planning

Retirement planning is a definite priority with every financial plan. Building a retirement corpus with proper investment advice and having assets that prepare you for a risk free and desired post retirement life, is not possible without a proper financial plan.

Creation of wealth

Financial planning creates a focused and systematic approach towards attaining life’s financial goals. A good financial planner will identify proper investment options for you, which will help you grow your money in a right way.