The Benefits Of Personal Financial Planning
Essentially, personal financial planning will involve the following areas: budgeting, savings and investment, insurance, management of "big-ticket" items, cash-flow management. Any financial education book will tell you that a good financial plan starts with budgeting, and it is true. A budget allows you to decide how much you can spend and save. Of course, the main objective is to make sure that your expenses do not exceed your income. This will create a surplus that can be used for your savings and investment.
Savings and investment are quite the same, yet not quite the same in its objectives. Both are "money left over" after your outgoing expenses are taken out from your income, and kept to achieve certain monetary objectives. But that is where the similarity stops. The difference between them lies mainly in their aims and and time period. Essentially, savings are meant to be "liquid" and can be withdrawn at short notice or within a short period of time. The returns from savings tend to be quite minimal. Just think of how much your bank savings account can get you in terms of returns. Investments tend to be less liquid (depending on the type of investments) and have a longer time horizon. The returns from investment can be much higher than savings. However, the risk can be high too. Depending on what you invest in, there is also a risk of losing the capital sum.
Proper personal financial planning should definitely include insurance. One main area of the role of personal financial planning is to make sure that one has the ability to carry on living in case of some unforeseen and unfortunate event. Basically, insurance provides a safety net to provide the necessary funds when one meets with events like accidents, disabilities or illnesses. One main contribution of insurance is that it helps provides peace of mind, knowing that enough funds are at hand in the event when things do not go the way it should be. This peace of mind leaves one with the energy and confidence to move forward.
You should think very carefully when purchasing "big-ticket" items. These things could be essential like houses or cars for transportation. Yet others may be considered luxury items like expensive sound systems and many other things. There is no right or wrong answer on what one should purchase. Everybody makes purchases for something for their own reasons. But the general idea in personal financial planning is never to put out cash for something you cannot afford.
Buying things on credit is usually a bad idea. The credit card companies do a great job of convincing the average folk that spending on credit is alright and that we should not delay our purchase until we can afford them in cash. Spending on credit, and in the process chalking up consumer debt is a bad idea. The prudent choice will be to wait until you can afford to buy the things you want.
There will be, without question, exceptions to this rule of thumb on financial planning. However, the exceptions are not many. One reasonable exception is the use of credit to purchase a property for residence or for investment. Not a lot of people can afford to pay up a house purchase all at once. A guy may have to wait a whole life-time if he wants to wait until the day when he can fully pay for it in one lump-sum cash.
Buying property for investment may be a brilliant idea if you know what you are doing. The main idea is that what you pay to the bank in bank loan and interests is more than offset by the returns on the property purchase. This is the concept of using "other people's money" to make money for yourself. There are a lot more details to look at in this type of investment. So do be very careful when proceeding with such investments.
Financial planning allow you to follow your own personal financial plan based on your own financial and non-financial situation so that your financial objectives at various milestones of your life can be accomplished. It helps to lessen the unexpected, so that one would not meet with financial tragedies like nightmares come true.
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