Financial Planning are those two words abhorred by many due to sheer lack of knowledge. When I casually asked a couple of my friends about their financial planning strategies, many of them mentioned financial planning is required only for millionaires and billionaires, not for us. A few others said it might cost a lot of money and a small percentage appreciated the importance of financial planning.
So exactly is Financial Planning? According to Financial Planning Standards Board of India, Financial Planning is process of meeting your life goals through the proper management of your finances. Life goals can include buying a house, saving for your child’s higher education or planning for retirement. Financial planning provides a proper direction to your finances. Ideally financial planning should take off as soon as you start earning, or at least a few years later, when you begin setting goals for yourself. Financial planning can be done with assistance from financial planners or on your own. In either cases, what matters, most, is consistency in your approach.
As said above, not many attach much importance to financial planning and often have to pay heavily due to that negligence. To realize your goals tomorrow, your finances today have to be in place. Financial planning can work when you follow simple tenets of managing your money today like budgeting, forecasting etc. Often simple mistakes act as pointers to bigger impediments on your way to goals. Stay aware.
We often come across these kinds of statements, which point towards lack of planning. The situations cannot be taken lightly and act as signals that signify that one is in need of financial planning.
I withdrew cash from my credit card account to pay down-payment for my car : Goals like buying a two or a four wheeler are quite common these days and there are loans to help you. However, goals like these represent high ticket purchases and need to planned some months, if not years in advance. All loans require certain amount to be paid as down-payment, which is generally 20% of the total cost. For a Rs 6lakh car, it would amount to Rs 1.2 lakh, which is not a small amount to go by. Again withdrawing the amount from your credit card is a total no-no. Cash withdrawals from credit cards are charged the highest rate of interest often going as 24-48% per annum. The right way here would be to plan and save the amount required for down-payment beforehand.
Last time, when my father was hospitalised, my friend helped me with all the expenses : Of course a friend in need is a friend indeed. However, where was your emergency fund or health insurance.? Financial Planning not only helps you achieve your goals, but also advocates to save up for your emergencies and be insured. Emergency fund which should be sufficient to meet at least 3 months of your expense is a must, either in your savings account or in a highly liquid instrument. This would help you tide over emergencies such as loss of job, health emergencies or any other contingency. Also health and life insurance is something that cannot be missed, especially when you have elderly to take care of or dependents.
I can forego my savings to buy a swanky flat: Everything in life comes with limits, same is the case with any of your goals. It can only be commensurate with your income. Owning a house is a dream for most of us and we all wish for the best, but if it comes at the cost of your savings, that wouldn’t be a right decision. Financial planning always requires you to set goals according to your current or expected income and priority of the goal. Accordingly go in for a flat, which allows you to pay EMIs and enjoy the flat at the same time.
I am planning to launch my entrepreneurial venture in the next 2 years: Inspired by the likes of Flipkart and many more, an entrepreneurial journey is on the minds of everyone. But it is not a cakewalk and involves long term financial planning. In addition to loss of salary income, one should be well prepared to fund expenses of the venture till it breaks even. This is impossible to do without planning and building a nest for it. Especially if you have liabilities like loans and dependents, you would need to have a strong financial plan in place.
We plan to go on a month long tour to Europe and Americas for our honeymoon: This one is a triple whammy. One is the wedding expenses considering Indian culture and traditions, all the changes in financial status (move to another city, support wife, set up a house, household expenses etc ) plus the expenses of a long drawn honeymoon. Each one of the three, by itself would need planning, in terms of finances and much more. An event of this kind where there would many changes expected, a proper planning would help you sail through. One should also consider the fact if both would contribute to the expenses involved in the honeymoon, to what extent and the means of financing the same. You wouldn’t want to start off a new chapter in life on low finances…plan and be prepared.
These might not be the only kind of situations where one should need financial planning. Retirement , birth of a child, kids education and marriage, a sabbatical for travel or higher studies, constructing a house, a vacation abroad or it might be anything, be rest assured with financial planning and proper execution, it should not be difficult at all. Happy Financial Planning!!
