Hemant Kumar Singh, Founder & Director, Emerging Finacare Services Pvt Ltd
When it comes to creating wealth over the long term, financial planning is an absolute necessity. Wealth creation refers to building wealth through a variety of methods using financial products while financial planning is the process of defining different financial goals, quantifying them factoring in inflation and having an investment plan to meet each of these goals. A financial plan can act as a guide for your future and will help you be in control of your earnings, expenditure and savings.
Financial planning helps investors achieve their financial goals such as home purchase, children’s higher education, their marriage, retirement planning, estate planning and long-term financial security. At the same time, taking these steps will help an individual be better prepared for unexpected risks such as untimely death, serious illnesses, sudden loss of employment, etc.
Most people do not understand the significance of financial planning and think that if they are able to save money, they will have financial security. But saving is not enough.
The biggest challenge people face in the absence of a financial plan is tackling inflation. This is where financial planning and consequently investing will help grow wealth while accounting for future inflation, thus retaining the value of your money.
The most important aspect of a good financial plan is linking goals with investments. Start by setting financial goals. Keep in mind that your goals need to be realistic and should promote long-term wealth creation. Choose appropriate timelines for them too.
Financial planning, if taken up at a young age, will help an individual stay organised, thereby leading to wealth creation in a comfortable manner. The power of compounding can help in building a considerable amount of wealth over decades. Therefore, the earlier you start investing, the better the investment experience.
Financial planning entails deciding various goals. Some of these are:
Creating an emergency fund: Building an emergency fund is an essential part of a financial plan. It can be used during uncertain situations, such as loss of job or paying for urgent medical care.
Saving and investing for your goals: Saving and investing according to a financial plan instills a greater sense of purpose in the journey to financial well-being and financial independence in the long term. This boosts your overall net worth and allows you and your family more financial flexibility.
Being disciplined in investing: Discipline in investing, adhering to your asset allocation and regular re-balancing are all essential factors for achieving success.
Reducing debt: Debt costs can be a huge burden on your savings and long-term financial interests. If you have a financial plan, you can plan big-ticket expenses and avoid or reduce the debt burden.
Better risk diversification: Asset allocation and risk diversification are critical components of a financial plan. A plan will help to choose the right investments as per your income capacity, risk profile and goals.
Improved lifestyle in a sustainable way: Debt-funded lifestyle improvements may not be sustainable. By practising goal-based investments, you can improve your lifestyle in a sustainable way, without relying on debt or compromising on other financial goals.
Save taxes: Having an investment plan can help you save taxes by investing in the most tax efficient investment options.
Build a retirement corpus: The average life expectancy has increased. Having a financial plan would allow you to maintain a comfortable standard of living and enjoy your retired life.
Financial planning is not about how rich you are but about converting your dreams into reality. All you need to do is define and prioritise your financial goals, analyse where you stand currently, and lay out a clear road map for achieving various goals.
It would be safe to conclude that a financial plan on paper or spreadsheet is of no use, unless you start acting on it. The earlier you start executing your financial plan, higher is your chance of succeeding in your financial goals.
DISCLAIMER : Views expressed are the author’s own