The simple definition of personal financial planning is how to better manage financial resources and achieve personal financial goals. The word financial implies that it is all about numbers and money.
The financial planning process does technically involve mathematical and financial calculations but it relates to savings and investments, debt management, retirement plans, risk management and so on.
Working out your financial position and ascertaining how much you need to live on will define the deficit or gaps, surplus, rate of return or cost of financing and many other benchmarks.
Yes, it may seem like just numbers, numbers, and more numbers but it is important to understand what these numbers mean. A good financial plan gives a sense of purpose which will help you shape values and beliefs, so you can think about what your life will look like and what you can do with it.
Here are five reasons why having a financial plan is not just about numbers and how it is a way to enrich your life.
1. An expression of love
A financial plan starts with setting financial goals, which means life goals. Common financial goals include:
- Staying ahead of inflation and maximising the return on your assets
- Having a comfortable standard of living for yourself and family
- Retiring comfortably and maintaining your desired lifestyle
- Sufficient funding for the children’s education
- Fulfilling religious obligations
- Avoiding unnecessary debt
- Security to sail through unexpected financial upheavals
In setting goals, you are acting out of love for yourself and the people around you. You have wishes and dreams to fulfil and you want a better, happier life for yourself and for them.
A Harvard Business School study has shown that people with goals are 10 times more successful than those without. And those who write down their goals are three times more successful than those who don’t.
2. Agility in crisis management
In life, there are always unforeseen events such as sickness or an accident. And sometimes, despite all your efforts, you do not achieve your goals.
A regularly reviewed financial plan will help put negative events in perspective. You can re-prioritise and refocus your financial plan. This will help you to move on and enjoy life again.
One of the important assessments is exposure to risk that is beyond your control. Not every risk can be covered by a plan but the skills you learn devising and living by your financial plan will help you adapt to any challenges.
3. Enjoying life to the fullest
A financial plan addresses your commitments and it covers or uncovers your other life goals such as an expensive hobby or a wish to travel the world. But if resources are limited, how do we decide how much to sacrifice versus how much to enjoy?
A regularly reviewed financial planning will help to:
- Identify the steps to help you raise enough money to pursue your dreams, such as pointing to where you can save more
- Better understand useful concepts, such as delayed gratification
- Discover life goals that align with your true values and reality. For example, from wanting to be a billionaire you shift focus to taking care of your health, your relationships or upskilling yourself in your areas of interest.
4. Leaving a legacy
We know that one day we will say goodbye to this world. The issue is we don’t know when. While we cannot control our fate, a responsible person should take charge of what they can control, making it easier for those who survive us.
A financial plan brings these benefits to those we leave behind:
- It is a one-stop-shop for them to find our financial data and important documents. While we are still alive, it is important to do regular housekeeping of our data and consolidate and organise them properly.
- It leaves a clear line of what is to happen to what you have left behind for quicker distribution. Fewer arguments, less stress, less confusion and less frustration.
5. A higher purpose
There may come a time when reviewing your financial plan is no longer about a monetary number. You will have achieved a sense of success and, at this point, what becomes important is giving back to society.
When you decide to make the world a better place for others, you are on a different plane altogether. You have uncovered a higher purpose in life.
Where to start planning your finances
Regardless of what stage of life you are in, it is important to start your financial planning journey. It is about managing expectations and emotions – about being grateful for what we have.
It motivates us to become better and stronger. It is also about dreams and thinking about our loved ones and, ultimately, peace of mind.
Financial planning is life planning.
This article first appeared in MyPF.
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