So What Role Does Personal Financial Planning Play

Category: Finance.

So what role does personal financial planning play? Another question that it asks is" What is in it for me? ".

It can be quite a lot to think about, it simply asks, but in essence the question of" What is personal financial planning" . Anyway, what should your personal financial plan consists of? In its most basic form, personal financial planning take into consideration the following areas: budgeting, insurance, savings and investment, management of" big- ticket" items, cash- flow management. The following information is a guide for the individual and one should take note of individual circumstances in their own context. Any decent financial education book will inform you that a good financial plan begins with budgeting. Budgeting enables you to decide how much you can spend and save. How true.

The main objective, is to enable, of course you to create excess money that can be used for your savings and investment. Both are the same in the sense that they are" money left over" after your expenses are deducted from your income, and kept for certain objectives. Savings and investment are quite the same, yet very different in what it they hope to achieve. But that is where the similarity ends. In essence, savings are liquid and can be withdrawn at a moment s notice or within short time- frame. The difference lies mainly in their goals and time horizon. The returns from savings tend to be on the low range.

Investments tend to be less liquid( depending on the type of investment instruments) and have a longer time horizon. Just think of how much your bank savings account earn you in terms of interest. The returns from investment tend to be higher than savings, so is the, however risk level. Insurance should definitely be part of personal financial planning. Depending on the type of investment, it is possible one may even lose the initial sum invested. A big part of the role of personal financial planning is to ensure that one has the means to carry on living in the event of some unfortunate events, both big and small. One major contribution of insurance is that it also provides peace of mind, knowing that financial help is at hand in the event things do go wrong.

In essence, insurance provides a safety cushion to provide some form of financial help when one meets with events like accidents, disabilities or illnesses. This kind of peace of mind leaves one with the energy and confidence to move forward in life. These items could really be essentials like houses or cars for transportation. Think very carefully when deciding on purchase for" big- ticket" items. Yet other items may be considered luxury items like expensive sound systems. Everybody buys things for for their own reasons- some which may seem totally irrational to outsiders. There is really no right or wrong answer on what are the" right" items one can purchase.

However, the main rule, as a guide of thumb in personal financial planning is never to put out cash for something you cannot afford. The credit card companies do a marvelous job of convincing us that spending on credit is alright and that we should not delay our purchases until we can afford to buy them in cash. Making purchases on credit is usually not a good idea. Spending future money( that is what spending on credit means) , and in the process chalking up consumer debt is really not sound. There are of course exceptions to this rule of thumb on financial planning. Usually, the right choice will be to delay the purchases until you can afford to buy them with the money you already have.

But the exceptions are not many. Not many people can afford to pay up a house purchase at one go. One main exception is the use of credit to purchase a property to stay or for investment. A person may have to wait a whole life- time if he intends to wait until he can fully pay for it in one lump- sum cash. The essential is that what you pay to the bank in bank loan and interests is more than offset by the returns on the property purchase. Buying property for investment may be a good idea if you know what you are doing. This is the concept of using" other people s money" to make money for yourself.

So do proceed with much caution. There are a lot more details to look at in this type of investment. The role of financial planning is simply this- to enable you to follow your own personal financial plan based on your own financial and non- financial circumstances so that your financial objectives at various stages of your life can be achieved. If you do not take good care of your personal financial planning- the price to pay could be your financial freedom! It helps to minimise the unexpected, so that one would not meet with financial disasters like nightmares come true.

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