The Benefits Of Personal Financial Planning

So what is the role of personal financial planning? Quite a mouthful, but to paraphrase it, it simply begs the question of "What is personal financial planning" and "what can it do for me?". So what should your personal financial plan entail? The following information should be taken as a guide only, and individual circumstances differ from one to another.

In its most basic form, personal financial planning take into consideration the following areas: budgeting, savings and investment, insurance, management of "big-ticket" items, cash-flow management. Any decent financial education book will inform you that a good financial plan begins with budgeting. How true. Budgeting enables you to decide how much you can spend and save. The main objective, of course, is to enable you to create excess money that can be used for your savings and investment.

Savings and investment are similar, yet different in its objectives. Both are money left over; after your expenses are deducted from your income, and kept for certain objectives. But that is where the similarity ends. The difference between both lies mainly in their objectives and time frame. Essentially, savings are meant to be and can be withdrawn at a moment's notice or within a short time-frame. The returns from savings tend to be quite low. Just think of how much your bank savings account can get you. Investments tend to be less liquid (depending on the type of investment instruments) and have a longer time frame. The returns from investment can be much higher than savings, but so is the risk level. Depending on the type of investment, one may lose even 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.

Making purchases on credit is usually not a good idea. 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. Spending future money (that is what spending on credit means), and in the process chalking up consumer debt is really not sound. Usually, the right choice will be to delay the purchases until you can afford to buy them with the money you already have.

There are of course exceptions to this rule of thumb on financial planning. But the exceptions are not many. One main exception is the use of credit to purchase a property to stay or for investment. Not many people can afford to pay up a house purchase at one go. 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. Buying property for investment may be a good idea if you know what you are doing. 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. 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 proceed with much caution.

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. It helps to minimise the unexpected, so that one would not meet with financial disasters like nightmares come true.

Ignore personal financial planning at your own peril - the price to pay could be your financial freedom!

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