In this fast paced life, people often tend to overlook small things and issues which sometimes have a significant impact on our life. For example, planning one’s finance seems to be a trivial issue, but it is one of the vital factors that affect life.
People ensure that the finances of their business are maintained and monitored regularly to avoid financial crisis, then why do they overlook planning their personal finances as well. Is it just because they are not accountable for their personal goals to anyone and they believe in spending until they are earning. Just as in business, isn’t it important to lay a solid foundation of your finances for the wellbeing of you and your family - it is.
It is said that ‘Hope for the best, But plan for the worst’. This is true for personal finances also. A person may be having a well paying job and earning well enough to cover his expenses but what will happen when he plans to buy a house, get married, and have kids or the worst lose his job. The uncertain nature of life increases the importance of financial planning. Financial planning means planning one’s investments in a manner to meet the financial goals. It is an analysis of how much a person earns, budgets, spends, and saves; also where his money is expected to come from, how it is going to be spent, saved and what returns will it earn in future.
Basically, a person needs to evaluate if his net worth is increasing because net worth is one of the best measures of financial health and easy to detect if a long term problem is emerging. To evaluate net worth, simply, reduce what a person owes to others (liabilities) from what he owns (assets). Even if there is no increase in the assets and the person is paying his debts, it can be said that the net worth has improved. A decrease in the net worth is not always bad, provided that the causes of decrease are known. For example, if there is an increase in debts due to an education loan for the child it will decrease the net worth but it’s not bad.
Financial planning is simple and meaningful if it is done properly. Here are some steps to ensure a sound financial planning-
- Make a list of financial goals - These can include long term goals like saving for retirement or short term / time bound goals like buying a house in 3 years. Ensure that the goals are realistic.
- Assess Current financial situation - It’s like making a personal income and expense statement. List out all the cash inflows (from where money comes) and cash outflows (where the money is spent). It will also give a clear picture of how much money is utilized and how much is going into investments.
- Understand risk appetite - Risk appetite is the amount of risk a person can bear while investing. Risk appetite for a person having a family will be different than a bachelor who has just got a job or a person who will retire soon. The type of investment will differ according to the risk appetite.
- Planning - Planning is done to cut down unnecessary expenses if a person is spending more than he is earning. Planning for investments is also done so that the financial goals are met.
- Execution - Mere planning is not enough, the plan should be executed also. Help of advisors, accountants, financial planners, lawyers can also be taken to ensure more apt investments.
- Monitoring and reviewing - The financial plan must be reviewed regularly for its performance and to incorporate changes. If it is found that the returns are not as expected, changes should be made. It is said that the rate of return from investment should be more than the rate of inflation at any time.
Personal financial planning is a judicious mix of earning, budgeting, saving and planning so that a person is capable of facing any economic crisis that occurs.