Why you need a Financial Plan


Planning is the pre-requisite for any goal, financial goals are no different.

Planning gives equal weightage to both the end destination as well as the journey, a healthy & a well-oiled structure more often than not makes the journey a smooth one.

To reach where you want to be eventually, it is important initially to know where you are & the path required to reach your destination.

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What is Financial Planning?

Financial planning is a step by step process that helps manage your finances in such a manner so as to help you achieve your financial & thereby life goals.

It works as a guide that helps you measure your current net worth, expenses & as well the investment required to meet your life goals.

How you manage any resource is often at times more than important than the resource itself, money is no different.


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Features of Financial Planning  

Step 1:

Understand & analyze where you are today, this means taking a stock of your:

  1. Savings
  2. Investments
  3. Current lifestyle expenses
  4. Emergency fund if any etc.

Step 2:

Understand & analyze where you want to be tomorrow, this means dividing your goals as:

  1. Immediate
  2. Short Term
  3. Medium Term &
  4. Long Term

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Step 3:

Now that you know where you are today & where you want to be tomorrow, the next step is to look at the various investment options available to choose from.

Not all investment options will suit you & you will not suit all investment options.

Separating the wheat from the chaff can seem like a cumbersome exercise but is a necessary one nonetheless.


Advantages of creating a Financial Plan

Prepares you for an Emergency

A Financial plan will ensure that you keep aside a certain amount for emergency purposes.

This should ideally at minimum be equivalent to 6 months of expenses or even more in certain cases.

This takes care of two things in one go, firstly in case of a financial emergency you are not scrambling for money & secondly your investments are not touched in case of any emergency.

It is good to be hopeful but better to be prepared.


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Helps create Wealth

Money can be earned but wealth has to be created and this takes time.

Having a financial plan will help you understand the goals you want to achieve & filter out the various avenues to achieve them.

Achieving these goals would require you to save & then invest these various savings into suitable products.

Savings alone cannot create wealth.


Helps manage expenses

Creating a financial plan will help weed out unnecessary expenses.

It makes you disciplined towards your savings & thereby your goals.

Cutting down on unnecessary expenses in turn means more savings.

Life goals to consider for Financial Planning


For once in the future humans might be able to defy death but taxes will always be certain.

We cannot avoid taxes completely but we can surely reduce them.

Having a financial plan has dual benefits here, not only does it help to save taxes but also helps in planning for them.

The government has provided various avenues via which you can plan for your taxes.

All these avenues differ in terms of their lock in period, suitability, qualifications, etc.



When you retire, you stop working but don’t stop living.

Your monthly expenses will continue as they were, in fact taking into account inflation, it will only grow further.

Further when you consider rising medical inflation & expenses & growing live expectancy, a retirement fund should be your primary goal when investing if not a goal you prioritize.

You are going to grow old, it is not a voluntary choice.


Child’s Education

From 2008 to 2018, education fees have risen by:

  1. 150 % for school and tuition
  2. 175 % for private schools
  3. 96 % for technical courses


Source : The Value of Education Learning of Life published in 2015 by HSBC Holdings Plc


When you are envisaging the future education expenses of your child, it should consist not only the course fees but should also account for:

  1. Inflation 
  2. Travel fare &
  3. Accommodation expenses and so on.

The fees of today will not be the same in 10 years’ time, inflation will make sure of that.


Having a financial plan in place will ensure that when the time comes, you would have accumulated a corpus that has beaten inflation comfortably.


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Why is Financial Planning important?


Helps to beat inflation

Suppose you have 10000 Rs in a Fixed Deposit fetching you 5% interest rate, after a year you will have 10,500. Now let’s say rate of running inflation is 7%, that would mean you need 10,700 to stay just on par. Forget about growing under such circumstances.

Even though you believe you have gained 500 but in reality you have lost 200 since your money could not keep up with the inflation rate. 

Your hard earned money loses value which in turn reduces your purchasing power, the gap between your money and the inflation rate keeps on widening.

This is the case with a savings account too.

Equity mutual funds fetch a high real rate of returns compared to other traditional savings & investment options.

This mean it not only keeps par with inflation but also is able to beat it in the long run.

Even though the returns can be volatile in the short term, in the long run it more than makes up for its volatility.

Equity is risky but inflation is riskier, choose your risk wisely.


Picking the right source

There are several sources of investments today.

Often even insurance & savings is mixed with investments.

Certain investments are suited only for medium term while some are only meant for the long term.

With some investments even though they seem as a great bet based on past returns, are not regulated.

Within the mutual fund space itself, there are more than 2,000 schemes to pick from.

Having a financial plan would mean having a conversation with a certified professional who will help filter and pick the right instrument suited for you.

When it comes to Personal Finance, the personal is of more significance than the Finance.



Often retirement is at the bottom of financial goals and most of the times it is not considered a life goal at all.

This could be attributed to our cultural mindset in thinking pension would be enough or kids will always be around.

Your children are not your retirement plan and there is no loan for the retirement goal as opposed to home loan and education loan.

According to a study by Max Insurance, 80% of urban Indians are no ready for retirement.

The longer you delay investing towards your retirement plan, the harder it gets.

Without a financial plan in place, may be retirement would never have been considered a goal itself.


A Financial Plan can be successfully executed only when it is monitored regularly. Underperforming schemes have to be moved out of & replaced by better ones. Your life priorities may also change with life changes like a job loss or the birth of your child and so on.

As your life goals keep changing and adding so should your financial plans.

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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
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