Financial Planning helps in improving risk management, improve portfolio ROI, uses metrics to manage money, among other benefits.
To do or not to do- this is the dilemma we all face in many a situation. While there is a yes and no as an answer to every dilemma, when it comes to financial planning, we would tend to lean towards the 'yes' more than the 'no'. In fact, in today's world, we would consider financial planning to rank pretty high in Maslow’s Hierarchy, and is as critical as the safety and social needs. Other than the fact that financial planning helps in bringing about discipline and achieving financial security, there are a few other reasons as well as to why you should do financial planning. Here are such top reasons:
1.Improves risk management: Taking adequate life cover and health cover is critical. When you do financial planning, you can determine the amount of cover you need with greater certainty. Thus you do not overpay for unnecessary insurance and also do not end up with a lower than necessary cover.
2.Improvement in portfolio return on investment (ROI): Financial planning takes into account various aspects like risk management, investment planning, goal planning, liquidity management and liability management. You are able to design an integrated investment plan that takes into account goals, available liquidity and risk appetite, thus helps in improving your portfolio ROI.
3.Use the metrics approach to manage your money: When you undertake financial planning, you can measure specific milestones on what you have achieved. There is a science involved in managing money and financial planning helps you do this with higher efficiency. 4.Identify good and not so good areas: Financial planning helps you bring order to your finances by identifying what is right and not right for you. For example, you may be low on insurance cover or holding investments which are performing poorly. Financial planning helps you identify this and take corrective measures.
5.Reduce your cost of personal finance: When you undertake financial planning, you can cut down on many personal finance costs. A good example is by doing away with expensive ULIP policies or any investment which carries high charges.
6.Discipline in managing money: Financial planning brings in discipline. Also, there are subtle behavioural changes when you undergo financial planning. For example, when you run a systematic investment plan (SIP), your expenses are automatically curtailed and this goes towards investments. Similarly, when you do financial planning, you become aware if your lifestyle expenses are above or below what you can afford. If it is the former, you can take necessary steps to cut back on unnecessary expenses.
7. Measure and improve asset allocation: Asset allocation is a critical element of managing your money. There has to be a fine balance struck between managing risk and returns, and the right assets need to be chosen for the same. Financial planning helps in selecting the right asset allocation mix depending on your risk and return preferences.
8. Future visibility: Planning is for the future. While we have often heard quotes saying that you should live the present and not dwell on the past or worry about the future, when it comes to money, considering the future becomes very important. Financial planning helps you get visibility for next 15-20 years. You are able to get comfort on retirement and planning your money during emergency situations. This helps in achieving peace of mind and also helps you plan in case there is a gap.
9. Estate distribution: Will writing and estate planning is an integral part of financial planning. When you do financial planning you can plan your estate distribution after your time, such that disputes are avoided.
10. Professional approach: There is a professional approach in putting together a plan and tracking it. You can implement best practices with the help of your financial advisor. All this brings about greater order to your money management practices.
Financial planning is not difficult. It is easy and it pays off handsome returns over the long term.
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