In this article
- “Change is the only constant factor”
- 6 Essential Reasons Why You Must Plan Your Finances
- Why Should You Have a Financial Plan
“Change is the only constant factor”
Everything changes. However, one thing that does not change is that everyone has desires and the same almost always needs money.
Here, by money, it does not just mean currency, but any sort of item which has to be given in exchange to achieve what we desire or need.
This too is another example of how things have changed. In the olden days, this was done by barter system, then paper money, and now even cryptocurrency is used as a medium of exchange.
The point here is that, to attain our life goals and desires, we need finances, and thus it is a good approach to plan our finances from the very beginning.
Let me get to the point.
I, as a person have desires. I want to buy a good car, a good watch, live well. Yet, I want a substantial amount in my bank account.
How do I reach this goal?
First, let me tell you that it’s not very hard. It is achievable! Here are 6 reasons how.
6 Essential Reasons Why You Must Plan Your Finances
1.Small Losses Affect Us In The Long Run
Money comes and money goes, and most people do not take notice of how and where that money was spent.
The question should be was it spent on something useful or could it have been avoided?
These are questions that need to be thought hard upon. One can either keep doing more of the same or be different Ultimately it’s the small amount which adds up to become a huge sum, which might become a financial burden in the future.
So from next time, think twice before buying that extra tub of choco-chip ice-cream.
2. Setting Goals Becomes Important In The Long Run
You might think that everything is hunky dory as of now. My finances are going quite well, but what about the future?
It is your responsibility to set certain financial goals for yourself. The goals that you will follow as a long term investment strategy.
In the earlier days, the cookie jar method of investing was followed. You can have your own methods.
The actual requirement of finances can be known only once the goal is set.
It is difficult to know the finance one has to save, how much investment is needed and by what time they will be realized.
These parameters will further help in judging if the goal is unrealistic or not. This can help one make necessary tweaks to their goals.funds
3. Keeping A Check On Your Cash Inflow and Outflow
Historically, companies check for the profit & loss or income expense statement to ascertain their financial health.
In modern times, this approach is being replaced and the cash flow statement is steadily gaining more traction.
This just goes on to show that one has to keep a strong watch on how things are flowing in and flowing out and make sure that this line does not go in the red zone.
4.Matching Income with Expenses
Another aspect that people fail to realize is that they do not ascertain their incomes and match it with their expenses.
Taking an example that A has taken a loan and is paying some interest on the same, and he used those funds in some venture or investment from where he is getting a standard return.
Now, A has the interest expense on the borrowed funds, at the same time other expenses, viz documentation, miscellaneous etc. which are being incurred.
It is very important to ensure that expenses are matched with incomes are incurred to achieve to get a fair view of the returns. Else this error can cause A to burn a hole in his pocket.
5.Success Motivates Us
Success is a good motivator.
When someone sees that they are capable of achieving their goals on their own feet by their own hard-earned wealth and systematic planning, the same gives a huge boost to their confidence level and in turn, inspires them and others to keep on this path.
But for that to occur, you must start the process. And remember, you will not be successful in every step. Few of your ideas might not work.
But the trick is to stick to your plan!
6. Invest In a Proper Plan
Be it any form of investment, the proper advice to a person in this aspect is to do proper planning. The right guidance pays off extremely well in the long run.
Be it mutual funds, ETFs through SIP or compound interests, the instrument of the investment will not matter if the goals are not set. One should know that it is important to know what their future goals are, adopt the most suitable financial plan and stick to it with dedication.
Why Should You Have a Financial Plan
1.Build an Emergency Corpus
Funds for emergency needs to be provided against any contingencies. As a thumb rule, one should keep as many funds as is needed to sustain them for a period of 6 to 12 months.
This would give confidence to a person without having to borrow the funds and thereby have added worries of interest costs. Neither would the need arise for the person to break into their long term investments which are mainly for meeting long term goals.
2.Saving for old age
Retirement should be the best time of a person’s life. The earlier one starts saving for retirement, the better. While saving, the following points should be considered:
- Cover daily expenses
- Cover any medical expenses
- Deal with uncertainties
Insurance– One should also consider insurance as an option. Depending on individual need, this policy provides protection against risk and enables income replacement in times of distress.
Tax Planning– Proper tax planning can also help in the long run. One should have an idea of exemptions in the taxation structure and plan their files accordingly. For those who cannot, it is always best to consult a tax expert.
A financial plan defines one’s goals and objectives; their hopes and dreams that take finances to achieve, and makes a plan to achieve them.
It may involve saving for both short and long term, investing and having adequate insurances to protect a person and their family.
It should take maximum advantage of the gains of their income source. It also should help one have the necessary legal documents in place to prepare their family in case of emergencies.
In other words, anyone who has any dreams they want to pursue which will cost them some money later down the line should start planning their finances right now. It is never too late to plan finances.
It becomes very important for an individual to have his finances planned as per his goals in life. Investing is a very essential part of financial planning and should be done in right investment instruments keeping in mind the risk one wants to take, the liquidity of the investment, tax benefits etc.
Post this keeping a track of the investment made and monitoring it helps us in planning our future finances in a much better way.