‘All you need is a plan, a road map and the courage to get to your destination.’ No one knows the future, but proper planning can get you closer to what one thought.
Similarly, planning is essential in all areas of life. For financial decisions, 'Financial Planning' comes into play. Financial planning is a compilation of all long-term goals and related strategies to achieve them. It's worth checking out every penny you earn, spend and save.
Financial planning is often misunderstood as being for the 'rich'. Well, this is a myth because everyone has financial goals to achieve in the future. Financial planning includes identifying short-term, medium-term and long-term goals, creating budgets, cutting costs, planning investments, mitigating risk through insurance, retirement planning and more. The financial plan is telling your money where to go, instead of wondering where it went
Why is Financial Planning Important?
The first step after formulating a financial plan is to create a monthly budget. This will give you the insights you need to know about regular expenses and income. In addition, to achieve long-term goals, it is essential to cut unnecessary spending and turn a deficit budget into a surplus budget.
The cost of living is not expensive, but the cost of the lifestyle is.
1. Creates an emergency fund
As part of an appropriate financial plan, disaster preparedness is crucial. There is nothing wrong with believing that there will always be something coming up in the next few months. It is better to be prepared for any uncertainty or misfortune. Generally, your emergency fund should be the sum of 6 months of your salary
2. Improves the standard of living
With a good financial plan, one does not have to compromise on their lifestyle to pay heavy bills. Regular savings will support a better quality of life and help achieve long-term goals.
3. Financial independence
A proper financial planning includes regular budgeting exercises, investment planning, and retirement planning. These are the steps towards financial independence. Throughout this entire journey, individuals will be able to create assets that are sufficient to generate income after their work. This can lead to early retirement plans as well.
Many people confuse financial planning with wealth creation. However, are they different? What is more important?
Well, it would be safe to assume that proper financial planning can lead to significant wealth creation. Therefore, Wealth creation is, in fact, an outcome of financial planning. ’
Wealth is the ability to experience life fully. — Henry David Thore
What is Wealth Creation?
Wealth Creation is the process of creating a pool of assets (stocks, bonds, real estate, gold and cash), which could be self-sufficient to generate a stable source of income to aid the livelihood. Robert Kiyosaki once said, “Don’t Work For Money; let money work for you.” A part of financial planning includes investment management with the end of goal of Creating Wealth. The simple guide to wealth creation is to start early, Invest in appreciating assets and invest for the long term.
The benefit of investing early in the career and staying invested for a long term is visible exponentially in the latter years of your investment cycle. This is the power of compounding.
Importance of Wealth Creation:-
- Regular source of income: Good investments in appreciation assets can provide a source of income (in the form of rent, dividend, interest) even after retirement. It helps to sustain the standard of living in times of emergencies, a sabbatical from work or also a health crisis.
- Healthy Retirement: Building wealth is imperative for a healthy retirement. Wealth creation matters as it will enable you to fund the post-retirement years.
- Goal-based investing: A goal-setting system helps to achieve targeted Wealth. It is always useful to have a goal in front of you to push harder to achieve the same. This works well with finances too. Goal-based investing is a matrix to measure the progress of wealth creation towards specific life goals like a world tour, marriage, children’s education etc.
What is an Ideal Wealth Creation plan?
Since Wealth creation is a subset of the overall financial plan, the steps for the same are similar too, listed as under;
- Creating a budget
- Invest rather than just saving.
- Understand the impact of inflation on saving.
- Investing in appreciating assets
- Becoming Debt-free.
- Cutting on unnecessary expenses
- Don’t mix insurance with investments
It would be safe to conclude that Financial Planning and Wealth Creation complement each other; it would be impractical to start wealth creation without proper financial planning. A financial plan allows you to identify the essential steps needed to take to be successful and profitable in a sustainable fashion
“Failing to plan is planning to fail” itself draws out the crucial need to plan and reduce risks in your financial endeavours! - Warren Buffet