Financial planning sets a path for informed financial decision making. People regulate their finances and improve their financial status by making logical decisions through planning. What some people don’t know is that it’s easy to make a financial plan. Any aspect considered while making a financial decision constitutes a financial plan. For example, a list of prioritized needs constitutes a simple financial plan.
This article highlights 5 reasons why every person should have a financial plan.
Why should one make a Financial Plan?
Preparation for emergencies:
Emergencies are unforeseen events. Some are good and others are bad. It is good to prepare for such events with a proper plan in place. In a budget list, a person should include an emergency fund. He should set aside some money for unforeseen events. There is no exact figure but he should take his total income into account while setting the emergency fund aside.
Achievement of goals:
People have goals and dreams to achieve in life. In most cases, these goals require money to accomplish. Short-term goals are to be achieved in less than one year, mid-term goals take 2-5 years while long-term goals take more than 5 years.
Financial planning sets the path to achieve these goals.
Management of funds:
It is estimated that more than 70% of breadwinners don’t know exactly how much they spend in a given time period. They end up misusing the money at some point. Some are even unable to meet their financial obligations such as rent, phone, electricity and water bills, tax overdue, and others.
A financial plan highlights key expenses to reduce wastage. It pinpoints the major needs and keeps a person from spending on unnecessary items.
For Investment Opportunities:
Investments expand a person’s income base. According to the Keynesian theory, savings are equal to investment. This means that in order to invest, one must have an equivalent amount of savings.
A financial plan outlines all incomes and expenditures for a certain period. It also reveals the surplus and deficits (if any), that can be converted into savings. Saving extra cash enables one to prepare adequately for future investment opportunities.
A financial plan is important for future planning and preparation for events such as retirement. By calculating the total incomes like salary, investments, bank interests, dividends a person can carefully plan for the future. They can calculate how much they will be having at a certain time in the future e.g. in 20 years.
Such calculations give a rough estimate of what to expect and how to prepare adequately for upcoming events.
Making a financial plan is not hard. However, making one that reflects the exact figures of income and expenditures is the real deal. Everybody knows their exact income in a specified time period. However, many can’t keep track of how much they spend and this might pull them into debts. To lean more you can follow the pioneers like Michael Majeed and others. Michael Shawn Majeed is a Toronto-based consultant and executive with more than two decades of experience in the financial services industry.
A good financial plan keeps one financially stable by enabling him/her to make solid decisions based on facts and future projections.