The Importance of Financial Planning

Financial Planning is very important from 2 Perspectives

Actual Investment Horizon

It allows you to gain an appreciation of your Actual Investment Horizon. This helps you identify the right asset class that you should invest in for each of your goals.

Financial Goals

It allows you to plan well in advance for your important life goals. Planning in advance, helps ensure that we do not fall short of funds at critical later stages of our life.

Actual Investment Horizon

The reason it is important to understand your Actual Investment Horizon, is that the risk of investing in equity reduces substantially over a period of time. While equities are highly risky in the short-term, they become virtually risk-free over the longer-term.

This allows you to enjoy the power of compounding your money at a higher rate of return, without having to take on a higher level of risk. This is explained in greater detail in our blog post – Why the risk of Equity depends on your Investment Horizon?

Correctly identifying your investment horizon, allows you to meet your larger long-term goals with a considerably smaller sum of investment. It also allows you to better manage your emotions, during volatile equity market conditions.

On the other end of the spectrum, financial planning also helps ensure that you do not forget to plan for your short-to-medium term expenses. You should never invest in equity, for money that you require in the short-term. Proper financial planning, which includes taking into account your shorter-term goals, can help you avoid having to redeem your equity investments at a time when markets have fallen.

Your Financial Goals

The second reason that financial planning is important, is that we often underestimate the impact inflation has on compounding costs over the longer-term. Also, a number of our larger expenses (such as our child’s education or funding our retirement corpus) are longer-term in nature. This becomes easy to ignore in the short-term, leading to us struggling to meet these expenses when they become due.

Planning well in advance, allows you to meet your larger longer-term life goals, by setting aside smaller sums of money in a systematic and periodic basis. This allows us to take advantage of the power of compounding, making sure that our money is working for us. The amount of money that we need to invest, substantially reduces when you start early and you invest in a systematic manner.