Financial planning usually comes into play when you are struggling to achieve one or another money goal or you simply find yourself falling short in meeting expenses. What it involves is carefully assessing earnings, expenses, and arriving at a spending equation that matches the two. Add your future financial objectives and you will have to input savings and investments into the equation.
When you get down to it, several nuances can come up in your financial planning equation and you have to be careful not to fall prey to some common traps.
1. Assuming all plans are achievable – The financial planning process calls for writing down your financial goals like buying a house, car, travel plans, education and so on. Once the goals are listed, values need to be assigned.
This is where it can get tricky. Income, whether through salary or investments, is bound to be limited. Financial values attached to your goals may surpass your ability to afford all the goals at the same time.
Budgeting means planning your expenses in a manner that you can not only afford them within your income, but also, you are able to make room for the required investments for your future financial goals and don’t disturb existing investments.
If so, you can do one of two things – either reduce the number of goals you have or reduce the value assigned to each goal. Sometimes you may need to do both. Hence, simply planning doesn’t achieve the goals, you have to assign realistic values depending on your income and ability to afford. Don’t plan a down payment on a Jaguar, if a Ford Eco Sport is what you can afford.
2. Planning without budgeting – That brings us to the next planning faux pas. Let’s say you have listed your future financial goals and ear marked regular investments required to achieve these goals. However, at the end of the month you find that expenses have gone
overboard, and you end up withdrawing from your investments.
Budgeting means planning your expenses in a manner that you can not only afford them within your income, but also, you are able to make room for the required investments for your future financial goals and don’t disturb existing investments. If your credit card spends are increasing every month, but income is the same, you will have to shop less for some time to build equilibrium or perhaps have fewer dining out meals and cook more at home. Your financial plan will suffer unless you budget daily expenses.
3. No reviews – Plans need to be reviewed. You may not want to indulge in a very frequent review of plans, but you will have to do it at least one a year. Financial values assigned to your plans can change periodically thanks to external costs. Secondly, your own income and expense dynamic can also change due to say a promotion or even high inflation.
Future financial plans need to be reviewed in light of these changes. Without such periodic review you may find that when the time comes to use your funds for the planned expenditure, you could fall short or alternatively, you may not be utilising excess funds efficiently.
Financial planning is not a one-time affair or about making a simple to do list. You have to iron out the edges and keep the goal in focus at all times. Without a periodic review you also leave yourself open to the danger of underachieving your plan.
Planning is a must, but make sure you do it right.