There's a famous quote of Allen Lakein which says 'Failing to plan is planning to fail' which shows the importance of planning. And when it comes to financial planning, every individual should be aware of the importance of it.
Financial planning helps to meet your short term as well as long term financial goals and in case of failure to meet these goals, it helps to create a rescue plan so that you can fulfil all your financial objectives.
So, here are some major reasons which tell us that why the planning of finances is helpful for us -
1. Investment Purpose
A proper financial plan keeps track of your objectives and the level of risk that you are able to tolerate. It will help you to choose the right category of investments as per your needs, personality, and goals.
There are various investment options available to investors.
Different investment avenues help investors to achieve different goals. When it comes to investing, many financial experts have highlighted the importance of mutual funds. For example, equity funds are considered best for a long-term goal like retirement planning or for a child's education, etc. If you are interested in a relatively steady income and you are risk-averse, you may want to invest in debt mutual funds whereas Equity Linked Saving Scheme (ELSS fund) are good to save tax. Investing with the help of the right financial advisor will do wonders.
2. Creating Contingency fund
It is said that Prevention is better than cure and when it's about money. We all are aware of the fact that the future is uncertain and anything can happen at any time. A sudden medical emergency or job loss or an unexpected financial crisis can affect your finances adversely. That is why you need to have an emergency fund to deal with such issues. Usually, financial advisors ask the investors to keep an amount equal to 6 months' salary as a contingency fund. This can be invested in a liquid fund so that you can access the money quickly in case of any financial crisis.
3. For Planning your Taxes
While planning your taxes, the best you can do is to take advantage of the various tax exemptions, deductions, and benefits so as to reduce your tax liability at the end of the financial year.
From a proper tax planning standpoint, you can avail a number of tax-saving options. For example, deductions available from Sections 80C to 80U are given in the Income Tax Act. The most efficient way to take advantage of Section 80C is to invest in Equity Linked Savings Scheme (ELSS). It has the shortest lock-in period as compared to all the other tax-saving options available under Section 80C.
4. Managing Inflation
As demand grows faster than supply it leads to a hike in price. In order to sustain inflation in the future, today is the day one should be actively planning finances. You can combat inflation by investing in avenues that offer you better returns over time. But for this, financial planning is critical.
To enjoy a happy and comfortable retired life, you need to start building your safety net right now. Planning at an early stage in life can help secure your future against financial uncertainties. If you're planning a retirement after more than 10 years you should plan to invest from now because the magic of compounding is experienced if stayed invested for a long term.
6. Manage your Debt wisely
If there is any kind of lack in debt management, it may take up a major part of your finances. You may end up borrowing fresh loans to pay off older loans. If it gets out of control, then you may fall into a vicious debt trap. However, strategizing your debt payment may keep you away from such troubles. Chalk out a schedule to pay them off. In case you have a lot of debt to shoulder, start paying off the most expensive one. Always keep debt as the last resort. As far as possible, make down payments for your purchases. Additionally, tax-inefficient loans like personal loans can be avoided as far as possible.
Questions like - Can I upgrade my car? Can I upgrade my home? Can I go for a long holiday? can be answered with a perfect and sound Financial Plan. Hence, it is really important to make a financial plan and accordingly act over it.