To attain one’s financial goals, one must first determine what those goals are. They must then quantify them, consider inflation, and develop an investment strategy. Financial advice can help you cope with the unexpected. it will also prepare you for the inevitable. Personal financial planning is important. It helps people reach their long-term goals of being debt-free. It helps them to own a home, send their kids to college, get married, and set up an estate.
Elements of a Financial Strategy
Following are the seven steps of personal financial planning. These are to demonstrate the significance of this process.
- Choosing and attaining financial goals involves figuring out what you want to do. Also, in setting a time frame in which to do it, and putting a monetary value on it, all while considering inflation.
- Investing the money you save by sticking to your budget is essential to achieving your financial goals. Expense budgets outline spending limits and areas where savings might be maximised.
- Your financial advisor will look at your age, income, expenditure, and debts here. This is to see how much risk you are willing to take (e.g. loans). Your risk tolerance and how you deal with setbacks are two aspects of your personality.
- Asset allocation is deciding how much of your portfolio should be invested. Asset allocation is critical for reducing exposure to risk. It also helps in achieving your financial goals. Your asset allocation should reflect your goals and your comfort with risk.
- Knowing how much and where to save is the crux of every successful investing plan. Systematic investment plans, or SIPs, are recommended for those with far-off savings goals. A portfolio may consist of stocks, bonds, and hybrid funds, depending on the investor’s desired asset allocation.
- Your family might struggle if tragedy strikes as a death, serious illness, or serious accident. When planning personal financial planning, risk management is an essential component. Both health and life insurance in adequate amounts are mandatory.
- Keeping checks on the progress your financial plan is making toward predetermined goals and adjusting accordingly is essential. As time passes, your goals may shift, necessitating a readjustment in your financial plan.
Why is it so important to have a personal financial plan?
Many people who put money aside for investment need to realise they need personal financial planning. It is because they feel that they will be financially secure if they save enough money. But more than putting money aside is needed. Let’s assume the typical lifespan is between 75 and 80 years. For the first twenty-five to twenty-five and a half years of your existence, your parents will provide for your every need.
Many items, including medical care and schooling, are increasing in price faster than the general price index. It would help if you got ready for it. Incomes and expenses are increasing as a result of a shift in lifestyle. Changing drastically after being used to a comfortable routine is difficult. To maintain your current standard of living while working toward financial independence, you’ll need to save much more money.
In light of these challenges, you must recognise the importance of personal financial planning. You must learn how much to save and invest, and where to invest. Most importantly, when to start saving and investing as soon as possible in your career.
Benefits of personal financing ahead of time
Improve your chances of achieving your goals by increasing your savings and investment efforts
Those with a stronger capacity to save and invest will eventually collect more wealth. Saving and investing with a financial plan can give your long-term efforts to achieve financial stability. It can also provide independence. The most important aspect of successful personal financial planning is linking long-term objectives with short-term investments. The sentimental investment increases the likelihood of sticking to your financial plan. One possible lesson here is the need for careful budgeting.
Maintaining your SIP regardless of market conditions, rebalancing, etc., are all examples of the investing discipline. These are essential to your success. Someone who invests by a plan is likely to be more methodical.
Facilitates debt reduction or elimination
Depending on the total amount of your debt, it might have a devastating effect on your ability to save money and reach your long-term financial goals. Save and invest by a budget. This can help you reduce your debt. This can be done while funding expenditures like a trip, a new vehicle, a greater down payment on a home, etc.
Increased safety from risk exposure
Asset allocation and risk diversification are crucial components. Any sound financial plan needs it. Without a plan, you may increase your portfolio risk by investing in assets that provide higher returns during bull markets. One benefit of personal financial planning is that it may help you safeguard your financial goals from the vagaries of the stock market.
Better your quality of life without compromising sustainability
The average Indian household is taking on more debt despite rising incomes. This reveals that investors rely on consumer credit, payday loans, and other forms of unsecured debt. They do it to fund their discretionary spending habits. Lifestyle improvements that increase debt levels might be unsustainable.
Save your taxes
Invest in the most tax-efficient investment options in line with your financial planning and asset allocation. You can reduce your taxable income and benefit from the provisions of Internal Revenue Code Section 80C.
In this article, we discussed why budgeting is so important. It’s normal to go into your first few years of work without a firm grasp on your long-term goals. A seasoned advisor may explain the importance and benefits of personal financial planning. A written or spreadsheet financial plan is useless if no action is taken. If you start working on your financial plan soon, you will have a better chance of reaching your goals. This calls for immediate action to start saving and investing. You may consult an expert from Piramal Financing House to get more financial advice.