Importance of Financial Planning for Individuals – By Muhammad Waheed Iqbal
Importance of Financial Planning for Individuals – By Muhammad Waheed Iqbal [FCCA, ACMA & CGMA – UK]
Every one of us has specific financial objectives, whether it’s to buy a new car, put a child through college, or move into a bigger house. You may have heard from friends, family members, or even social media marketing about the importance of financial planning to achieve your goals.
However, most of the time, such alarms are given without any guidance on how to put it into practice. In reality, the process of financial planning involves more than just increasing your savings. You require an effective financial planning strategy if you want to achieve your goals.
Financial planning is not only for wealthy people; it is equally important for low-income earners. Making a personal financial strategy is advantageous for everyone. Furthermore, financial planning is a never-ending process. Your financial plan will require significant adjustments based on changes in your risk profile, future expenses and income projections, and household structure.
Through this article, you will learn about the following regarding financial planning:
- How to manage your present financial condition?
- How to apply a step-by-step financial planning approach to make your ambitions come true?
A. The Importance of Financial Planning
Financial planning is crucial for many reasons. The paragraphs below will highlight some of these points.
- Grow Your Savings and Strengthen Your Shield Against Inflation
Keeping your money in cash can lead to a decline in its purchasing power over the time due to inflation. Your savings will steadily lose value unless you invest them appropriately. Sound financial planning can help you combat inflation and boost your savings.
- Prepare for Unforeseen Costs
Unforeseen expenses can arise at any time, such as unexpected car repairs. Sound financial planning can help you assess the risks and be ready to handle them appropriately. Knowing the potential expenses and setting aside some cash each month to cover them are essential components of financial planning. This can help you avoid being unprepared and facing a hefty payment.
- Save for Your Children’s Higher Education
Sending your children to college can be costly. Sound financial planning can help you start saving for their education as soon as possible. This can help you avoid the need for either you or your child to take out loans or find other means to pay for higher expenses of universities.
- Foster Mental Tranquility
Financial planning can help you set aside money as a “rainy day fund”. In case of job loss or the inability to work, this fund can provide peace of mind knowing that you can cover your rent and food costs for at least a couple of months without having job.
B. How to Develop and Implement Financial Planning
The following guidelines provide a framework for developing and implementing effective financial planning:
- Know your present financial circumstance.
Before you can set long-term objectives, it is essential to determine your existing financial situation. This includes understanding your spending patterns, assessing available funds, and projecting anticipated expenses. You should also evaluate how you are utilizing your funds, such as identifying expenses by distinct categories, including utilities, dining out, and travel.
By identifying your financial position, you can find opportunities to optimize your spending. For instance, if you realize you are spending an excessive amount of money on coffee, you can take steps to reduce this expenditure.
Initially, focus on saving a small amount of money each month by reducing expenses or increasing revenue. This will help you transition from your current breaking-even position.
- List down your financial objectives.
Financial objectives can include paying off a mortgage or setting aside funds for a child’s university education. Categorize your objectives based on priority, separating essential needs from desirable extras. As basic principle, at first our focus should be on “Essentials”.
Ensure that your objectives are measurable, achievable, and have a specific timeline. Use the SMART technique to define your objectives, which should include specific, measurable, achievable, relevant, and time-bound elements,
It is also advisable to discuss and agree on these goals with significant decision-makers, such as your spouse.
- Develop strategies and implement.
When selecting between investment options, it is crucial to understand the implications of your choices. Consider factors such as risk tolerance, age, financial objectives, and investment possibilities. Each strategy has different implications and results, depending on your objectives. For example, if you are saving for a child’s university funding, your portfolio should have more weight towards holding stocks since they tend to appreciate more quickly than bonds or annuities over a more extended period. On the other hand, if you are about to retire, you will likely choose a retirement portfolio with a higher percentage of bonds and other assets offering a consistent return.
- Re-align and update your financial plan
Your priorities and financial needs may change over time, such as marriage, having a child, buying a property, or receiving a promotion. Therefore, it is essential to evaluate and update your financial plan regularly to ensure it aligns with your current goals.
You may need to revise your financial plan to incorporate new requirements and needs, which can include a change in investment strategy, adjusting financial objectives or reassessing your risk tolerance.
In conclusion, I highly recommend everyone should understand the importance and need of financial planning as it is not only essential for your well-being but also of those you care about.
Contrary to popular belief, you do not require a highly reputable or qualified financial planner to pursue your financial objectives. The average person can prepare their financial plan on their own, as the process is simple and accessible.
By following the straightforward guidance outlined above, you can easily prepare your personal financial plan and manage your present and future needs as well as those of your family.
So, take charge of your financial future today and start planning for a secure and prosperous tomorrow.