Financial planning is a systematic way to create a roadmap for your personal finances in such a manner that you are able to take care of your future goals, protection needs, and other aspects of your finances.
Ten Reasons Why Financial Planning is Important
1. Investment Aggregation:
As an investor, you would have invested in various products, such as stocks, mutual funds, bank deposits, post office products, gold, etc. The details of these investments, including the account number, nominee details, valuation, etc., are often not stored in one place. Financial planning helps you gather and put all of these together in one place for better management.
2. Better Budgeting
One of the first exercises you do is to write down your income and expenses. These help you create a proper budget and help in the efficient utilization of resources. E.g., if a family is looking to increase the amount it wants to save every month, it can look at cutting down on unnecessary expenses.
3. Avoid keeping money in dead investments
The traditional equation of savings was Income minus Expenses = Savings (which were often not invested in time). Financial planning helps you turn this equation into Income + Investments = Expenses. Since you have budgeted for your expenses, you can make an investment as soon as you receive your income.
4. Identify your goals
The first step towards achieving the important milestones in your life is to identify them and set a timeline and amount for them. Research has identified that your efforts and motivation will be focused once you have a tangible goal in sight. It also helps the advisor nudge you to make proper investments.
5. Monitor your investments
The advisor helps you review your portfolio on a regular basis. This ensures that if there are any junk investments, they can be reallocated to better-performing assets.
6. Invest as per your risk profile
Investing as per your risk profile helps you stay invested for a longer period of time without worrying about market movements, and more importantly, it gives you peace of mind. E.g., if you are a moderate investor, it is better to have a mix of investments that give assured returns and market-linked returns.
7. Have an emergency fund in place
One of the first steps in implementing a financial plan is to create an emergency fund, which helps you take care of any contingencies that might arise. An emergency fund comes in handy in difficult situations like the current one, where many people had salary cuts and some also lost jobs.
8. Take care of Protection Needs
A financial plan is not just about investments. A financial advisor will also help you buy proper insurance products like term life insurance, medical insurance for all the members of the household, and other insurance like personal accident, critical illness, etc. In the event that a family member is hospitalized, the health policy can be used to pay the hospital bills. Similarly, a term cover helps a family tide over the financial loss in the event of the death of an earning member of the family.
9. Helps you focus on your job and career
Since you have planned for your future, you can devote undivided attention to your career and job. This ensures you excel both in your professional life and in your financial life.
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