Need for Financial Planning

From Financial Literacy Wiki

Need for Financial Planning

Personal financial planning is necessary if we want to improve our standard of living, minimize the likelihood of financial disaster, meet foreseeable financial needs and most importantly, to build a comfortable-sized retirement nest egg.

Most people desire to improve their standard of living over time and to maintain it during retirement years. Some aspire to a comfortable lifestyle, one in which they need not worry about every single purchase they make. While others wish to upgrade their social status, by improving on the cars they drive and houses they live in. To ensure that these wishes become a reality, it is necessary to consciously plan for these outcomes. Seldom do people attain their desired standard of living by luck. They have to work for it. Winning lottery might be another way, but what are the chances of it?

Personal financial planning also reduces the likelihood that you will be adversely affected by major financial disasters. Imagine these scenarios, you are suddenly taken ill or retrenched. Under such circumstances, you may encounter severe cash-flow problems. You may not have enough savings to tide you over periods of illness or unemployment or both. As ill health and unemployment can happen without warning, it is wise to plan for such contingencies. Having and maintaining an emergency fund can help. The size of this fund depends on your current lifestyle and the expected duration of illness or unemployment. But generally, it is prudent to keep between ‘’three to six months’’ of your salary in an emergency fund.

Instead of keeping all your hard-earned money in savings deposits or time deposits that pay meager interest income and may not generate sufficient returns to offset inflation, you should consciously look out for higher yield instruments to make your money grow over time. Careful investment planning allows you to exploit opportunities that may arise from time to time as conditions in financial markets, both local and overseas, change.

Personal financial planning also helps you to accumulate wealth for the future, especially retirement. Formulating a well though-out plan and constant monitoring of the plan will allow you to take corrective actions so that the chances of retiring from your work life, with substantial wealth is greatly enhanced.