More than 90% of the people reading this blog will agree to the question about their opinion regarding importance of managing personal finances. But most of the people would also agree to the fact that they had been ignoring or postponing it considering it to be tedious, monotonous task which restricts them from enjoying their lives, may be cutting down on movies or candle light dinners etc. My focus in this post would be to convince you or at least pull you on the tracks of my thought process, so that you can appreciate the purpose of planning your personal finance with a long term perspective. And by this you can determine if it is worth planning your finances.
- Power of Compounding.
Most of the time, when I bring up the topic of savings and investment in front people from late-teens and early twenties, I can read the tag of “Not Applicable” on their face telling me that my words make no sense for them as they don’t have jobs or have recently got a job. Whatever money they get, they want to enjoy most out of it, which not not wrong though! But, what they are missing at a specified tenure is quite substantial. The key to understand this is “Compounding”. It brings the non-linearity between invested amount and the value of investment after specified tenure.As you can see, money grows faster after 7th year. It is because, as the base of investment increases, ‘%’ starts showing its trick! 10% of 100 is 10, whereas 10% of 1,000,000 is 100,000. So, if one is consistently putting some small amount along a period of time. Investor can reap its hefty benefits in coming future.
- Well-planned risks are worth taking.
Rewards come with risks. Being risk averse is good but not much rewarding. This is one of the reasons why a well-designed portfolio is necessary. It provides a good risk-return proposition. Though, the level of desired risk has several underlying variables like age, income, life-stage, number of dependents. So, do plan for a well-designed portfolio before investing.
- Risks having huge impacts, but hardly considered.
This can be better explained with the help of examples:
a. Risk of shortage of funds: A couple saves for their child’s marriage and buys a property which could be sold before marriage to fund the occasion. If they didn’t plan for the tax incidence on the sale of such property, it might be a case when the realisable amount might fall short threatening the quality or quantity aspects of financial goals.
b. Risk of regularity of income: It is necessary that the flow of income be regular in order to keep the financial plan on track. If the flow breaks due to death or disability (because of any accident) of the earning member can jeopardise the whole financial plan and also threatens the financial security of the family until and unless provisions for such things have been made via. proper insurance.
c. Risk of unplanned monetary outflows: It can be during transfer of estate while succession takes place or during medical emergencies. The monetary drainage is huge in such cases. So, proper planning can help you dodge such unplanned outflows and help in leading a more planned approach towards managing your finances.
Small steps that can get you started!
Till now you have seen a brief snapshot which emphasises the need and advantages of financial planning. And no learning is knowledge without imbibing it within self. So, I will mention few easy steps which will get you started up in the practise of financial planning:
1. Budgeting: There are many budgeting apps in app stores. Make use of them. They are very easy to use and do not require much of your time. Try using it, you will feel the difference in your finances within few months.
2. Note down your daily expenditures: Several budgeting apps have this option too! but you can do it in Excel or your dairy as well. This is a good tool to analyse where you are overspending. (It should be done in addition to budgeting).
3. Stay tuned with my blog! 🙂
Do evaluate if these benefits of financial planning weighs heavier than your time and resource commitments. This will enable you to get started in case you think it is useful for you. This being my first blog, I have taken a broad view on importance of finance in one’s life. My subsequent posts will have more specific view on various streams of finance and how you can benefit from them.
(Often, encash them!!) 🙂 🙂