The importance of a financial plan, especially for young working individuals, cannot be stressed enough. Proper financial planning at the start of your career will help you create wealth and financial security until your retirement years.
Let’s closely examine the need for a financial plan, its benefits, planning for retirement, how to combat inflation and attain financial goals through life insurance plans, child education plans, pension plans, and so on.
Benefits of Having a Financial Plan
Let us go through a few top benefits of having a financial plan:
- Helps You Have a Set Budget and Prevents Overspending
It’s best to structure your life around a proper budget, so that you are aware of what your monthly income and expenses are. Sure, you can save money without having a financial plan, but a financial plan gives you direction. You will have a good idea about your expenses and will be able to track and cut down your costs to a considerable extent. You will find that there may be routine expenditures which can be easily avoided. One way to manage expenses is to make bulk purchases, which will cut down expenses considerably.
- Helps You Enjoy a Comfortable Standard of Living
Many people assume that they will have to sacrifice their standard of living if they have to pay Equated Monthly Installments(EMIs) and bills. But a financial plan helps them to live in reasonable comfort even after paying their EMIs. Paying some bills in advance can get you discounts. A good financial plan will empower you to take control of your finances. You can easily direct any savings into a vacation fund, and book flights, hotels, etc. during the non-peak season.
- Helps You Stay Prepared for Emergencies
A good financial plan will ensure that unforeseen emergencies can be taken care of. An emergency fund, up to six months of salary, will create a buffer, at least in the short term, in case of a job loss. Some part of the salary should be transferred to a separate recurring deposit account, which can be used as an emergency fund either for emergencies like job losses or a major unforeseen medical expense. Still wondering why you need a financial plan?
- Boosts Your Financial Goals
It may seem daunting, but you can achieve your financial goals through a proper financial plan. An individual may have a desire to own a car, invest in property, start a company or plan for their child’s higher education. All of these can be achieved by investing in equity mutual funds or planned life insurance plans. A financial plan will help give you a fair idea of surplus cash that can be used for these purposes.
- Prepares You for Retirement
Retirement may be nearly 30 years away, but it is necessary to plan for it now. A good financial plan will help an individual to invest in life insurance pension plans which will enable him to get inflation adjusted to his monthly income in his retired life. Monthly expenses are likely to rise to a minimum of six percent, so it will be necessary to invest in insurance plans which offer guaranteed returns, and pension plans which offer regular income post retirement. A financial plan will reveal that it is futile to keep a large amount in low interest-bearing bank fixed deposits, even though it may be safe.
- Helps Combat Inflation
Money is also saved simply by keeping your surplus funds in a savings account or bank fixed deposits. But with interest rates at a low 6 percent or so, absolute returns are negative. A good financial plan will enable an individual to invest in different avenues like mutual funds, insurance plans and commodities, which will help them to combat inflation, and generate higher returns.
You should now know why you need a financial plan. The future is uncertain, so there has to be adequate life insurance that will provide financial security for the family in the case of the person’s unfortunate demise.
The insurance cover should be at least 10 times of his annual income. Similarly, the financial plan should be able to make adequate provision for education of the children, and should cover adequate medical insurance.
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