What is financial planning and why is it important? All you need to know
What is financial planning?
Financial planning refers to acquiring information about your financial needs and then making a comprehensive plan to reach your financial goals with as much certainty as possible.
Financial planning considers the following factors: your current financial situation, what you wish to do with the money you will acquire, and how you are willing to invest your money to achieve your goal.
Thus, to define it in a sentence, we can say: Financial planning is a means to achieve your future goals through proper development and implementation in accordance with some general guidelines.
Financial planning includes applying globally accepted management principles like planning, directing, organizing, and procurement of funds to invest and generate maximum possible returns.
It helps you prioritize your investment decisions based on the urgency of your goals. People have both short-term and long-term goals.
For example, a short-term goal like buying a car in two years requires a much different planning approach than a long-term goal like buying a house in 10 years.
Both these aims have entirely different capital, returns, and financing requirements.
We can say that financial planning will lead to asset management and not the other way around. Once a plan is laid out, the implementation requires proper management of the available assets to generate maximum returns to fulfill your goals.
Importance of financial planning
A significant advantage of a financial plan is that it helps you build financial security for yourself and your family as well you can grow your assets and prepare for financial emergencies.
It helps you fulfill your dreams. Some reasons why you should consider building a financial plan:
Give a perspective on your financial goals
Once you have a clear goal in mind, you will be able to employ financial literacy in a well-defined direction to achieve your goals.
With a plan, you also employ popular money-management techniques like the 50/30/20 rule (See here: Tips to follow for 50/30/20 Money Management Rule) and the (15-15-15 rule of investing), according to your needs.
Through financial planning, you can prioritize monitoring a fixed budget for your expenses and moving towards investing a chunk of your income.
Growth of assets
The ultimate purpose of a financial plan is to increase your asset base. By investing intelligently (with proper diversification and allocation), you will earn high returns and preserve your wealth, thus extending your investments and increasing your net worth.
Start your financial planning journey now so that you don’t miss your goals by the margin.