Everything that is fruitful in life requires timely and strategic planning. You can think of literally anything and you’ll find this to be true – from a fun road trip to wealth creation. For a road trip, figuring out what your route is going to be, which pit stops you will make, what snacks you need to stock up on, what playlist you will drive to, and what your overall budget for the trip is, is the starting point. And for wealth creation, the starting point, too, is planning – financial planning. This involves creating a budget for cash flow management, jotting down your financial goals, building an investment portfolio to meet your goals, retirement and tax planning, etc.
If you’re not quite convinced, let’s look at some reasons that will highlight the importance of financial planning in your life.
- You can achieve financial mindfulness
When you create a monthly budget and know what your short-term, medium-term, and long-term goals are, you can improve your financial health. That’s because knowing the ‘why’ behind any goal, financial or otherwise, helps to stay disciplined and on track. When you know what financial goals you are saving for and exactly the amount you need, it will be easier to stick to your budget. It will help you avoid impulse purchases and keep discretionary expenses to a minimum. Financial planning will also allow you to save money and begin investing if you have not yet. For instance, instead of spending Rs. 500 on a pizza on a Friday night, you can whip up something at home and use that money to invest in mutual funds through a Systematic Investment Plan (SIP).
- Your investments are tied to goals
Investing randomly in securities will not help your money grow. Each investment you make, be it stocks, mutual funds, gold, bonds, or fixed deposits, has a specific risk-return profile and an ideal investment horizon. Where you should invest, how much, and for how long all comes down to one thing – what your goals are. Once you are clear about that, you can build an investment portfolio that will effectively work toward getting you closer to your goals. For instance, if your goal is to buy your first house 10 years from now and you need to save for its down payment, investing in equity may be beneficial as you have a long-term horizon that can help hedge the stock market risk while also earn you high returns.
- Inflation reduces the value of your money
If you have Rs. 50,000 in your bank account now, five years down the line this amount will not hold the same value. That is because inflation increases the price levels of goods and services in the economy over time and thereby reduces the purchasing power of the money you currently have. To beat inflation, and safeguard the value of your hard-earned money, you can plan your investments to earn returns that are inflation-beating. Investments that give inflation-beating returns basically have returns higher than the inflation rate. Stocks and gold are some of the best investments for this purpose.
- You can save on income tax annually
By law, every income-earning individual in the country is required to pay a certain amount of income tax each year. This amount depends on your annual income from all sources – salary, business profits, rental income, interest, dividends earned, etc. – and the income tax slab you fall under. Accordingly, you will have to pay income tax as per a certain percentage. However, the Income Tax Act, of 1961 has several provisions for tax savings. If you make specific investments, you can claim tax deductions and exemptions and reduce your overall taxable income, and hence your tax liability. Some of the popular tax-saving investments include Equity-Linked Savings Scheme mutual funds, five-year fixed deposits, National Pension System (NPS), etc.
Financial planning is not a one-time thing. With every change in your life stage, income, needs, and more, your financial planning will look different. When you are getting started, it’s natural to feel overwhelmed and confused. Hence, consulting a financial advisor can help. They can lay the foundation of your financial plan and then you can take it from there.