April is the first month of the new financial year. It is better we start planning regarding our finances now rather than at the end of the financial year. It is a good sign to move ahead with our finances in a planned way rather than haphazard way.
Financial planning is a process of managing our finances in order to achieve the financial goals. Before you start planning you should have financial goals. It is very important. We should know what the goals are, once that is clear the rest all are easy. Examples for financial goals are buying a property, buying a home, going on a vacation, visiting a relative in a foreign locale and so on. Let the goal be very specific, if the goal is very specific then I am sure the path that leads to it also can be easily figured out. Once the goal is set the planning becomes the next step.
A good financial plan requires analyzing the financial status, outlining the goals and understanding the means for achieving these goals. The most important analysis is your spending behavior, it is very necessary to know where your money goes. I have written about it here and here. Read it whenever you can find time. Why I give importance to spending is because it is not easy to have more than one income but if we can control our expenditure then it adds to our savings which is significant. Once you are done with your analysis, this will help you to optimize your expenditure and increase your savings. Viewing each individual expense as a whole enables you to understand the impact on your long term financial plan. For example, investing in a certain mutual fund might help increase your returns but might not work out too favorably once its tax implications are concerned.
A good financial plan helps in setting realistic time horizons to achieve goals and assists in achieving them with discipline. The ability to mitigate risks when investing is another important facet that financial planning addresses. Why is it necessary to set realistic time horizons? Is it important? Yes, it is very important; a plan without a definite timeline is not a good sign. If you keep unrealistic time horizons then it will unnecessarily put pressure on you and if you fail, it will demotivate you. Hence make sure you set realistic timelines. If you plan up correctly then it is very easy to mitigate risks. Mitigating risks is very important in the investments. It will ensure that you will not face any major setbacks on your path to reach the goal. The risks are necessary and sometimes it may be going against you but that will not stop you from reaching your goal.
Understanding the risk-taking ability along with achieving long-term goals can often be a fine balance in today’s volatile markets and the ever changing global economic factors. Traditional bank deposits do not yield enough returns to beat the soaring inflation rates. Falling equity markets, resulting erosion of wealth, have added to the woes of investors. It is during such times that disciplined investing and focus on the long-term ensures wealth creation.
More on Financial Planning in coming weeks. Keep Visiting.