Significance of Financial Planning

Financial planning is the process of identifying various financial objectives, quantifying these objectives while taking inflation into account, and devising an investing strategy to achieve these objectives. Financial planning also prepares you for unforeseen dangers such as untimely death, significant sickness, or job loss. The importance of financial planning aids investors in achieving their financial goals, such as home purchase, further education for children, marriage for children, retirement planning, estate planning, and so on, as well as long-term financial security.

What is the significance of financial planning?

Many investors are unaware of the need for financial planning and believe that if they can save money, they would be secure financially. However, saving is insufficient. Assume a life expectancy of 75 to 80 years. Your parents will take care of your needs for the first 20–25 years of your life. Your working life will normally last 35 years, during which time you must provide for the needs of your family (spouse, children, dependent parents, etc.) as well as save enough to meet your own needs during the 15 to 20 years you will be retired.

Inflation diminishes the purchasing power of money over time, therefore if you want to attain your financial goals, your money must rise at a quicker rate than inflation. Certain expenses, such as education and medical care, are rising at a far greater rate than the CPI. You must prepare for it. Also, as incomes rise, people’s lifestyles change, resulting in increased expenses. It is difficult to change your way of life after you have been accustomed to it. If you want to achieve financial independence while simultaneously maintaining your lifestyle, you’ll need to save significantly more money. Given these obstacles, you should understand the importance of financial planning, including how much to save and invest, where to invest, and, most importantly, how to begin saving and investing early in your career to accomplish all of your goals.

Benefits of Financial Planning

Save and invest more in your goals

More wealth will be created by investors who can save and invest more. Saving and investing according to a financial plan gives you a feeling of direction on your path to long-term financial well-being and financial independence. Goals that are linked to investments are the most crucial part of a successful financial plan. We have feelings associated with goals such as purchasing a home, furthering our children’s education, marrying our offspring, and leaving a legacy for our loved ones, among others. The emotional connection strengthens your commitment to your financial plan. This is why financial preparation is so important.

Disciplined investing

Investing discipline, such as keeping to your SIP regardless of market conditions, sticking to your asset allocation, and rebalancing regularly, is critical to success. If you invest according to a strategy, you are more likely to be disciplined.

Aids in debt reduction and debt elimination

Debt costs can wreak havoc on your savings and jeopardise your long-term financial goals. If you invest according to a financial plan, you can use your assets to fund large-ticket purchases such as vacations, vehicle purchases/upgrades, a larger down payment for a home purchase, and so on, while also lowering your debt burden.

Better risk diversification

A financial plan’s asset allocation and risk diversification are essential. If you don’t have a financial plan, you can end yourself investing in assets that produce larger returns in bull markets, increasing your portfolio’s risk. Protecting your financial goals from the volatility of capital markets is one of the advantages of financial planning.

Save taxes

An investment plan can help you save money on taxes under Section 80C while also allowing you to invest in the most tax-efficient investment options based on your financial goals and asset allocation.

Improve lifestyle in a sustainable way

India’s average household debt is increasing despite rising disposable incomes. This demonstrates that investors finance their lifestyles via credit cards, personal loans, and other means. Debt-financed lifestyle changes may not be long-term. Parents are known to invest a large portion of their savings in their children’s higher education and subsequently sacrifice their lifestyle to save for their retirement. You may improve your lifestyle over time without relying on debt or sacrificing other financial goals if you practice goal-based investment.

Final Thoughts

We talked about the necessity of financial planning in this article. In the early stages of your career, you may not have a clear understanding of your long-term objectives. An experienced financial planner or financial advisor can explain the importance of financial planning as well as why it is vital. A financial strategy on paper or a spreadsheet is useless until you put it into action. The sooner you begin implementing your financial plan, the more likely you are to achieve your financial objectives. So start putting money aside and investing.