When we talk about financial planning, we think of companies. But in the current economy, planning of finance must be adopted by individuals as well. The requirement for the planning of personal finance has never been more important.
Planning of finance is crucial for the well-being of a person. Here, the article talks about various aspects that you need to learn before planning your finance. Go through the article and start a comprehensive plan today to lead a peaceful life. Learn about meaning, components, objectives and reasons for financial planning.
What is Financial Planning?
Financial planning is an important aspect of one’s life. It is a process of determining your goals and budget for spending on different things. Financial planning provides one with a proper direction for achieving various goals. For example, if you want to buy a home, you need down payment. Most of us apply for a loan to cover this expense. The decision is made without considering your financial status. And such decisions can be the reason for our downfall.
But this can be avoided by planning your finances. With the help of financial planning, you can set up a procedure to achieve your goals. When your finance is planned well, then you would know whether or not you can afford the home. This type of planning is the need of the hour. It also makes life easy and better.
In simple words, it can be said that financial planning gives you control over your income and expenditure. Being in control of what you want to spend and how you spend is vital for one’s growth.
Objectives of financial planning:
Finance planning is done to achieve certain objectives. Important objectives of such a plan are:
- The first objective that is achieved through financial planning is the availability of funds. A comprehensive plan paves the way for the availability of funds whenever they are required. This money can be used to meet day to day expenses or unforeseen expenses.
- The next objective of financial planning is avoiding unnecessary raise of resources. Usually, when we are short of money, we borrow, which may not be necessary. With a plan in place, you can decide whether or not to take a loan.
- One other objective of financial planning is that it encourages investment. A plan shows what funds you have and how well you can utilize them. It also shows if the investment is possible by the money you have.
- Finally, the last objective of the financial plan is a long-term view. A plan helps in setting up money for using it at a later period.
Components of a Financial Plan
Four core components for complete finance planning are as follows:
Cash flow analysis
The foremost component of financial planning is to understand the cash flow. If your expenses are more than your income, then achieving goals is impossible. To analyze your cash flow and make a connection between your assets and liability.
The second component of planning in relation to finance is an investment. Through planning, figure out whether you can afford to invest. And also what is your take on taking risks while investing. This component of planning is essential to increase your cash flow.
Planning your retirement
The next component that you should include when planning your finance is retirement. This will help you understand when you can retire. This component must also include the lifestyle of a person retiring along with income needed.
Finance plan must also include a component on tax. This is vital to maximize and protect the returns arriving from an investment. Every state has its own tax law, study them and see if you’re eligible for government benefits.
Reasons Why Financial Planning is Important:
We all understand that financial planning is essential. Now, let’s see the reason as to why you need to plan your finances.
To secure your family:
The main reason for personal finance planning is to secure your family. Tomorrow is uncertain; anything can happen. There is no guarantee of a person’s life or job. In such a situation having a concrete financial plan will help your family and secure them against such mishaps.
Increases your cash flow
Financial planning helps you keep an eye on your spending pattern. This will make you cut-back on unwanted expenses and start budgeting. In this way, with the help of financial planning, you can increase your cash flow.
To be prepared for emergencies
Once you start personal financial planning, the need for an emergency fund is clearly understood. The fund so created must be equal to cover 6 months of your family expenses. Setting up an emergency fund provides you with peace of mind in case of job loss. This fund enables you to pay for all the essential bills until you find a new job.
It provides a better standard of living
It is a common practice among people to forfeit your wants and lifestyle to meet monthly expenses. This need not be a permanent situation. A concrete financial plan will help you pay bills and mortgage on time. And at the same time enjoy your lifestyle without worrying about the expenses.
It aids in achieving your goals
A financial plan assists a person in a very stage of life. It acts as a road map that aids in achieving different goals. These goals can be buying a home, taking a vacation or buying a luxury car. In other words, it can be said that a financial plan keeps on the path to reach the destination.
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