Financial Planning: Definition, Importance, and Benefits

What will happen if you jump into unknown waters without appropriate safety gear? You will either sink or swim. However, the chances of the latter are pretty slim. On the other hand, if you're equipped with the right gear, you have a higher chance of swimming back to safety.

When navigating the different economic seas, smart financial planning does the same job as the safety gear. It keeps your finances on track and your goals within reach.

Let's understand how.

What is financial planning?

As you may have guessed, financial planning is the process of creating a plan to manage your finances better. With a proper financial plan, you can create a successful roadmap to achieve your life goals. Not to mention, you can bring greater clarity and direction to your financial choices.

For some, financial planning can mean planning for retirement using mutual funds or building a corpus for emergencies. For others, it can mean planning for loan repayment or taxes.

Key Benefits of financial planning

• Life is uncertain and full of surprises. But if you are financially prudent and prepared for rainy days, you can manage any challenge life throws at you.

• Prudent asset allocation is another advantage of smart financial planning. Mutual funds, equity shares, etc., carry high risk. So, you need to monitor them regularly and see how they are performing. If they are not providing any value, you can always rebalance your portfolio.

• Having a sound financial plan brings more discipline to your life. You learn to manage personal finances better and keep track of your spending habits. Thus, helping you save more.

• Lastly, financial planning helps you navigate different stages of life with ease. You learn to manage the needs of today while preparing for the future.

See why financial planning is beneficial? Now, let's understand how to get started with it. 

Additional Read: What is Goal-Based Financial Planning?

How to create a financial plan?

1. Frame goals

You can't score a goal if you don't know where the goalpost is, can you? To create a sound financial plan, therefore, start by defining your goals for future. It could be something as simple as investing in a mutual fund online. Or improving your salary structure to boost your purchasing power.

Whatever you decide, focus on optimising savings without compromising on your quality of life.

2. Create a budget

Next, budget your monthly earnings into fixed and living expenses, discretionary expenses, savings, and investments. This will give you a bird's eye view of your finances and help cut frivolous costs to improve savings.

3. Review plan periodically

Last but not least, remember: financial planning is always a work in progress. So, you need to revisit and revise your financial plan regularly.

Take stock of your investments and savings. Should you increase your monthly investment in SIP? Perhaps you should allocate more funds to debt funds? A quick review can help you sort out such changes and keep in step with the economic climate.

Additional Read: Best SIP for Long Term Financial Goals

Bottom line

See how effective financial planning is? So, if you're eyeing long-term profits from your investment, start planning today.

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