What is Financial Planning?

Financial planning involves creating a plan that will protect you and your family in the event of a reduction or cessation in income, death, disability or when you are out of work.

The Financial Plan will also help you determine how much money you need to retire, pay for your children's education, and fulfill your personal goals like buying a car or going overseas.

Financial planning is not rocket science. It's about how smart you can manage your money. These are the fundamental parameters of a sound personal finance plan goal based financial planning.

1) Protection

2) Savings (medium- and long-term)

3) Investments

You will notice that protection is the most important parameter in financial planning. Insurance is a way to hedge against risks. Insurance is a way to protect your income from death, disability, and other risks.

John, for example. A married engineer and his 2 children. He makes $4000 per month. John would have $480,000 in 10 years. That's $288,000. Let 60% go to family expenses, which is $288,000. John would be left with a $288,000. An insurance policy could cover this gap and allow John's family to live a similar life.

Savings is the second aspect of financial planning. Because you will have to spend money on certain events in your life, saving is vital. Your wedding, your children's university education, renovations to your home, and your retirement are all examples of the things you need to save. These are expensive things.

It is important to save at minimum 10% of your salary. Remember, you must pay yourself first!

Investment is the third parameter that we take into consideration. After setting aside money for emergencies, it is a smart idea to invest. This could be anywhere from 3-6 months of your monthly salary. This is to ensure you have enough cash for your funeral expenses or in the event you lose your job.

You may be asking why you shouldn't keep all your money in the bank. You'll end up losing money if you do this. Current inflation is around 3 percent. Inflation can cause you to lose as much as 3 percent each year. Your purchasing power is affected if your bank does not offer you higher interest. In the 1960s, a plate of noodles cost $5. It now costs $3.00. This is 6000% more than it cost 40 years ago!