Role 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.

Basically, personal financial planning will take into account the following areas: budgeting, savings and investment, insurance, management of "big-ticket" items, cash-flow management. A good financial planning book will let you know that a good financial plan starts with budgeting, and it is true. A budget enables you to decide how much you can spend and keep. Of course, the main idea is to ensure that your outgoings (expenses) do not exceed your incomings (income). This will create excess funds with which to save and invest.

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 Essentially, savings are meant to be and can be withdrawn at a moment's notice or within a short time-frame.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.

Insurance must definitely be part of robust personal financial planning. A big portion of the role of personal financial planning is to make sure that one has the ability to carry on living in case of some unfortunate events, both big and small. In essence, insurance provides a safety net to provide some form of financial assistance when one meets with events like accidents, disabilities or illnesses. One major way which insurance can help is that it also provides peace of mind, knowing that financial assistance is 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 to do the things we need to do.

You should consider carefully when purchasing "big-ticket" items. Some of these items could be essential like houses or cars for transportation. Others may be considered luxury items like expensive sound systems and dozens (even hundreds) of other things. There is no right or wrong answer on what one should buy. Everybody buys something for their own reason. But the rule of the thumb in personal financial planning is never to buy 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 are, without doubt, exceptions to this rule of thumb on financial planning. However, the exceptions are far and few in between. One main exception is utilising credit to buy a property to stay or for investment. Very few people can afford to pay up to buy a house at one go. An individual may have to wait a very long time if he intends to wait until he can fully pay for it in one lump-sum cash. Purchasing a property for investment may be a good idea if you know what you are doing. The nuts and bolts of it all is this - 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 idea of using "other people's money" to make money for yourself. There are plenty more details to look at in this type of investment. So do be cautious when doing this.

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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