The importance of financial planning

Fri, Oct 26, 2012

by MAXINE JOHNNEY

Financial planning is the process of meeting your life’s goals through the proper management of your finances. This can range from short-term, such as savings for a car and budgeting household expenses, to the long term creation of savings for retirement.{{more}} It is an important process that individuals should practise in order to ensure that optimal funds are available to meet their present and future well-being.
Financial planning is an evolving plan that changes as an individual grows in his/her career path and moves on in different stages of life. The plan should be reviewed as the circumstances in a person’s life change, to ensure that the person is still on the path to achieving his/her financial goal. Getting married and raising a family are examples of circumstances that will affect a person’s disposable income.

There tends to be a misconception that financial planning is only for businesses or for the rich and high income earners and as a result it may not be of top priority to some individuals.

After all, if one does not have a lot of money, what is there to plan? But this is so wrong, since it is not how much money you earn, but how you allocate whatever income you receive.

Savings is a major component of financial planning; hence we should always bethinking about how we can save. I have often heard people say that they are not making enough money to save or when they accumulate a lump sum they would start saving. Their thinking is that it is not worthwhile to save a small amount of money on a monthly or weekly basis; but what is important is that a percentage of what you earn is set aside. This amount, whether considered large or small, would accumulate over a period of time and create wealth which can be used for attaining future goals.

Individuals who save or invest small amounts of money early in life often tend to do better than those who wait until later in life.

Financial planning allows you to understand how each financial decision you make, affects other areas of your finances. For example, the decision to fund your children’s tertiary education would enhance their quality of life, but this may delay your retirement plan. If you have a planned approach to what you want to do with your finances, you are more apt to get there.

The following planned approach can be taken:

❏ Determine and understand your financial situation – an individual should analyze his/her income against his/her expenses and assets against their liabilities.

❏ Set your life goals – set targets of what you want to achieve and when you want to achieve this. For example, you may want to own a home; further your education or your children’s education; be debt free when you retire and have resources available to finance your funeral.

❏ Formulate your plan to achieve your goals – develop the habit of budgeting monthly and following your budget. Determine what percentage of your disposable income would be saved and where you can make changes in your monthly expenses. Look at different investment options.

❏ Once the plan is in action, examine and evaluate whether it is working or if it needs to be adjusted. Financial
planning is a dynamic process that will not change your situation overnight. As conditions in your life change, revisit and revise your plan to ensure that you are on track with achieving your financial goals.

Some people hate planning, but it is best that you prepare financially. Some of the benefits that can be derived from financial planning are:

1. It allows you more discipline in the spending of your money – by having a clear plan regarding your financial resources and savings. It will motivate you to stick to your monthly expenditure and would prevent over spending and unmanageable debt.

2. It provides a better direction and meaning to financial decisions – it enables you to compare your income against monthly expenses; you may never have to worry about random spending when you realize the benefits of savings. You will be more in control of your finances rather than your finances controlling you.

3. It helps to provide a stable balance between your present and future lifestyle. It makes it easier for individuals to maximize their cash flow and make solid investment decisions.

4. It makes you more equipped for dealing with unforeseen expenses – when you are faced with some sort of emergency or unforeseen expenses. Having a solid savings plan can help reduce your financial obligations.

5. It ensures that you are more secure in having funds available to meet present and future needs – planning helps prevent you from living frompay check to pay check.