Saturday, February 16, 2008

The Need for Financial Planning

Financial planning seems to be the buzzword of our generation. A term that has gained unprecedented popularity with rising disposable income and relatively complex investment instruments.

This term could sound new, however, the concept isn't.

Financial planning simply means striking a balance between your income and expenditure in order to achieve your financial goals. The goal could be a good life after retirement or planning for your child's future or education.

The first step to financial planning is identifying and setting your goals. Depending on your goals and time available to achieve it, you allocate assets to maximize the returns. However, financial planning doesn't only mean saving and investing for wealth building but one of the pillars of financial planning is protection of wealth and lifestyle in unforeseen situations. Financial planning must begin with taking adequate life insurance cover for you and your family.

One common mistake that a lot of us make is that we look at insurance only as a wealth-building tool or worse, only as a tax saving instrument. I would reiterate the need for taking insurance cover for what it's meant for: providing security against unforeseen risks.

A health cover is equally important. If your company provides you a group mediclaim policy, do find out its details or buy one for yourself and your family.

Your investments and savings without protection against your life, health and property and contingencies are castles without a foundation.

Even a hint of rough weather can pull it down easily and take your entire wealth accumulation over years down the drain.

Another important decision to make before investing is to understand your risk appetite. Equity by nature is a risky tool and debt is safer.

However, in the long term, equity always gives better returns than debt. So, you need to strike a balance between your investment's time horizon and risk appetite.

The most important aspect of financial planning is the beginning itself. The sooner you begin the better. Professionals advise to start planning as soon as you receive your first pay cheque.

However, the beginning is just the first step, a strict adherence to the basics of financial planning would not only ensure you a life without worries, but also help to add value to it.

Last but not the least, it's never too late to make a beginning. Even if you've been managing quite well without a financial plan, believe me, having one will only add to your riches!