While savings and investments are a big part of a sound financial strategy, there are other factors to consider. What are your long-term goals versus your short-term needs? What is your budget? Have you planned for an emergency?
Financial planning helps people determine whether they are on track to achieve overall financial success. So, in this article, we will go through the importance of financial planning.
Financial Planning: What is it, and why is it so important?
A financial plan is a process where you analyse your current financial situation, determine your long-term financial goals, and set your savings and investments in place to achieve those goals. Financial planning is a process that you can do on your own, or you can seek the help of a certified professional, such as a financial planner.
Basically, financial planning will help you to reduce your stress about money. And it not only helps you now, but it can also help you in the future and even prepare you financially for retirement.
A financial plan is important because it helps you maximize the value of your assets, ensures that you meet your financial goals, and gives you the confidence to face any challenges that may arise.
How to Start Planning Your Finances
To create a sound financial plan, it’s important to consider a few things. Here are three things to get you started:
- Calculate your net worth
It doesn’t matter if you are rich and famous; strong financial planning strategies start with assessing your own net worth. A great way to do this is by taking a more in-depth appraisal of your:
Assets: property, vehicle, savings and investments, etc.
Liabilities: outstanding mortgage, credit card and student debt, car loan, etc.
Net worth = Assets – Liabilities
- Determine your cashflow
Another thing to consider when creating a financial plan is where you spend your money and when you usually spend it. One perfect way to do this is to record all transactions, including when money comes in and is spent. This will be especially helpful when figuring out how much money is needed for necessities each month and the money left over for savings and investments so that you can make financial adjustments.
- Define your financial goals
The most important aspect of financial planning is to clearly define your financial goals, which could include:
- Buying a property
- Paying for post-secondary education for your kids
- Starting a business
- Making plans for retirement
You are the only one who can prioritise these goals and develop solid savings and investments plans to achieve them.
How to Develop a Financial Plan?
Developing a financial plan helps you to balance your short-term and long-term monetary goals, as well as deal with any unexpected events.
Here is a quick rundown of the steps involved in creating a financial plan:
1. Set goals
Your financial goals help guide a good financial plan. In other words, when you approach financial planning, your savings and investments will be much more intentional because you decide how your money will work for you. This can apply to anything from buying a home to retiring early.
To set goals, you can ask yourself where you want to be in five years, then 10 and 20 years. At this point, you should also consider if you wish to own a car, a house, be debt-free, or have children, as well as your retirement plans.
By asking these questions and setting these goals, you can better determine and complete the next steps in your financial plan.
2. Budget
Budgeting should help you determine your monthly cash flow and savings and investments plan. At this point, you must decide how and where to send those funds. A budgeting worksheet can help you easily visualise how, where, and when you spend your money regularly.
Budgeting also helps you figure out where to direct more funds into your savings and pay down debts. It will help you in your short, medium, and long-term plans, just like setting goals. A popular example of how best to budget is the 50/30/20 principle.
3. Emergency plan
A solid financial plan must include an emergency plan. For example, putting aside even ₹500 in the beginning for minor emergencies and repairs will help you avoid incurring credit card debt. When you can afford it, you can increase your emergency fund to ₹1,000, then to a month’s worth of living expenses, and so on.
4. High-interest debt
Paying off high-interest debt like education loans, home loans, credit card balances, etc., will help you create a stronger financial plan. Since interest rates are usually so high, you usually end up paying two to three times what you borrowed.
5. Protect and grow
Financial planning is mainly about protecting yourself and your family from financial difficulties, both anticipated and unexpected. As you grow in your career, you can continue to protect and grow financially by returning to basics such as:
- Contributing more to your retirement accounts
- Increasing your emergency fund until it has at least three months of living expenses (for essentials)
- Getting insurance to protect your financial stability and your family members in the event of an illness.
About Multipl
Multipl is the world’s first “Save Now, Pay Later” app. With Multipl, you can create goal-based investments, which means you can save and invest at the same time for a specific purpose.
The Multipl investment engine allocates the right assets and investment portfolio based on your duration, purpose, and risk profile so you can achieve your goal with maximum safety and liquidity. You can create both short-term and long-term savings goals like Gadget Goal, Vacation Goal, Child’s Education Goal, Retirement Savings Goal, and many more. In addition, brands co-invest with you to save more towards your goals. To learn more, download the app from Play Store/App Store.
