Financial planning is one of the first steps towards a healthy financial life. Yet very few of us have a financial plan in place. And even within this set, very few of us actually follow the plan. “Why should I have a financial plan. After all I am making good money” is something that is not uncommon to hear. In this post, I’ll share 3 reasons why you need a financial plan.
Here are some reasons why you need a financial plan
1 – Income is for limited time. Expenses are forever.
Most of us earn for a limited period of your active life. And then we retire. This may be voluntary or forced due to personal or business circumstances. Worse, in some cases health may not permit to work.
At the same time, expenditures are still there. With inflation, expenses are likely to increase. For this, you need to spend money, even when you are not earning. Hence, you need to have source of funds, which is something else than your paycheck, which can fund your expenses even while you are not working!
Even if you may be able to meet your expenses today, it may not always be the case. A proper financial plan can help you generate the much needed cash flows even while you are not earning. It forces you to think beyond your paycheck.
2 – Some life goals require lot of money and you need to plan for it.
Expenses in life are usually much more than just day to day expenses. You may, for instance need money for education of kids, or wedding, buying a home, or going on a vacation(s). There are many instances in life where you need access to large chunk of money, sometimes suddenly.
Without any proper financial plan in place, you may well fall short. Antidote to such situation can be sound planning and execution of that plan!
3 -You need to safeguard against risks & emergencies.
Life is not always predictable. Your predicted script for your life is unfortunately, susceptible to lot of vagaries. There might be health issues. Or there may be job loss. There may be some issue with your house that may require urgent (financial) attention.
You may not be able to predict the unpredictable. But it is always a good idea to be prepared for such issues. Having an emergency fund in place and having a proper insurance (life & health at least) can be a good beginning. Your financial plan is the first step towards getting these things in place.
Taking a loan can help in such cases, but why to take a loan, which you can (hopefully!) avoid such situation with sound planning.
What if you don’t have a financial plan?
In such a case, you may well cruise through the life smoothly. Good if that happen. But it is not always that simple. No?
While you may be able to do well, it is also likely that any major unpredictability or unpreparedness can set your life off track!
Few (random) examples:
- What if you are laid off from your job suddenly?
- What if you or your family member has a major health issue?
- Suppose your daughter receives admission into a very good (but expensive) college, and you are unprepared to pay the initial fees because you never planned for such major expense. What will you do? Take a loan? Or scramble to sell a asset? Or let go of that opportunity?
- What if you are in your 50s and have sudden realization of long retired life ahead, but don’t have much savings?
Once there is a realization that you actually need a financial plan, the next step involves actually planning and executing. It involves aligning your resources to your long term objectives & planning your finances towards those goals. There is much more to financial plans than chasing high returns. And like most of the thing in personal finance, there is no one-size-fits all solution.
It’s more personal than finance!