World Financial Planning Day: What it means for you as an investor

World Financial Planning Day is observed every year on the first Wednesday of October to raise awareness about the importance of financial planning. World Financial Planning Day falls on October 5 this year. It is also a part of World Investor Week and is sponsored by the International Organization of Securities Commissions.

For retail investors, the day serves as an opportunity for them to introspect how they have fared in their financial planning journey and whether they need to take proactive steps to align their financial plans with their goals. And for those who are yet to be initiated into the rituals of financial planning, this day can be a good time for them to introspect their existing relationships with money and commit themselves to a suitable financial plan. The objective is to spread awareness about the importance of financial planning, the benefits of always having a financial plan in place, and roping in the guidance of ethical and competent financial planners.

Why financial planning is important

The term ‘financial planning’ keeps floating around us all the time but what exactly does it mean? Financial planning entails an overall evaluation of an individual’s current financial situation and putting into place strategies for achieving monetary goals in accordance with their financial situation. Here are a few reasons why you should make financial planning an indispensable part of your life:

1. Preparing a reservoir for emergencies and rainy days is one of the core aspects of financial planning. There is no way to predict the next hairpin bend in one’s life and this can be in the form of a minor discomfort such as your phone or laptop needing repair to something as life-changing as a loved one suffering from illness or sudden income loss. While there is little you can do to avoid such situations, having a good financial plan can prevent your life from getting completely derailed and can make it easier for you to bounce back from such episodes.

2. There are so many times in life when despite our best efforts we fail to reduce our expenses. A sudden breakdown of your car or a home appliance, an unplanned travel itinerary, or an onslaught of medical bills incurred because your doctor asked you to get a bunch of tests done – there are numerous occasions when the money tap just won't stop flowing. A solid financial plan ensures that your money is managed in an optimum way and you have ample liquidity to fulfill these needs without letting your financial health be affected drastically.

3. The test of a good financial plan is that it helps you maintain an appropriate balance between expenses and savings. A trickle-down effect of this is that if you have a sound financial plan in place, you will be able to fulfill your needs, chase your aspirations and also build a stash for the reservoir without ever having to take on excessive debts. Loans and credit card debts can be a two-edged sword and a disciplined approach to financial planning can help you steer clear of being over-indebted.

4. A good financial plan can empower you to climb higher on the socioeconomic ladder in the long run. When you learn to manage money in a way that reduced wastage, your retained earnings increase, you are able to fulfill your short, medium, and long-term goals and you develop a large enough safety net to be able to navigate through unseen circumstances without having to suffer or cut corners. This can alleviate your quality of life and it makes it easier for the younger generations to access the best of everything in terms of healthcare and education and chase better opportunities.

5. Aging is a universal truth and so is the fact that you will not be able to keep working all your life. Retirement may seem far off on the horizon but it is a chapter of life that requires a dedicated financial plan because with diminished earnings, galloping inflation, and increasing age-related health issues your pension income will hardly suffice in the absence of enough savings and investments accumulated in your younger years. This is especially important in our country were depending on adult children during retirement years continues to be fairly common.

Taking baby steps

Financial planning is yet to become embedded in the collective financial attitudes of the population. Yes, there is growing awareness about the need to make efforts for financial freedom, but existing perceptions about money management remain clouded in confusion and negligence.

Misconceptions about investment methods and asset classes make many investors embrace investment courses that may be completely unsuitable for them. This trend is more pronounced in the case of investing for long-term goals such as retirement where investments revolve around a favoured few investment avenues.

On the brighter side, the advent of a plethora of digital personal finance portals and the treasure trove of information on different aspects of investing that can be easily found on the search engine platform and is helping many people move away from the shadows of financial illiteracy. Elevated knowledge levels are crucial for nudging people to start taking financial planning seriously.

If you are yet to start with a financial plan and feel overwhelmed by the thought of it, here are a few simple steps that can ease yourself into the process:

1. Gather all the information about your sources of income, debts, assets, and liabilities to get a picture of your current financial situation.

2. Identify your goals and put a timeline to your goals and try and draw an estimate of the amount of money you would need for your goals.

3. Once you understand where you stand financially and where you wish to be, you will have an idea of the shortfall.

4. This shortfall has to be fulfilled by building your savings and investments during the time you have stipulated for a particular goal.

5. If you are new to the world of investing, you can speak to a financial advisor to get an idea of your risk-taking abilities and the asset classes that would be suitable for you.