Goal based Planning

Financial Planning or Wealth Creation: what comes first?5 min read

‘All you need is a plan, the road map and the courage to press on to your destination.’ No one knows the future, but proper planning can get you closest to what one would have thought.

Similarly, planning is necessary for all aspects of life. For money-related decisions, ‘Financial Planning’ comes into the picture. Financial planning is a compilation of all the long term goals and related strategies to achieve the same. It mostly keeps a good check on every penny earnt, spent and saved. 

Financial planning is often misunderstood to be just for the ‘rich’. Well, this is a myth since everybody would have financial goals to achieve in the future. Financial planning includes identifying the short term, medium-term and long term goals, creating budgets, cutting down on expenses, planning Investments, mitigating risks by Insurance, Retirement Planning and much more. A financial plan is telling your money where to go, instead of wondering where it went.

Why is Financial Planning Important?

  1. Disciplined Savings

The first step after creating a financial plan is to create a monthly budget. This will give you essential insights into regular expenses and income. Further, to achieve the long term goals, it is vital to convert a deficit budget to a surplus budget by cutting down on unnecessary expenses. 

“The cost of living is not expensive, but the cost of the lifestyle is.”

  1. Creates an emergency fund

As part of an ideal financial plan, it is crucial to prepare for emergencies. There is no harm to believe that there is something that is always coming in the next few months. It is better to be ready for any uncertainty or misfortune. Usually, your emergency fund should amount up to 6 months of your salary

  1. Improves the standard of living

With a sound financial plan, one does not need to compromise on their lifestyle to pay hefty bills. Disciplined savings regularly shall support the improved standard of living as well as help achieve the long term goals.

  1. Financial independence

A proper financial plan will involve regular budgeting exercise, investment planning, retirement planning etc. These are stepping stone to reach financial independence. In this entire journey, individuals can create assets which will be sufficient to generate income post their employment. This could also lead to early retirement plans.

Many people confuse financial planning with wealth creation. However, are they different? What is more important?

Well, it would be safe to assume that proper financial planning can lead to significant wealth creation. Therefore, Wealth creation is, in fact, an outcome of financial planning. ’

Wealth is the ability to experience life fully. — Henry David Thore

What is Wealth Creation?

Wealth Creation is the process of creating a pool of assets (stocks, bonds, real estate, gold and cash), which could be self-sufficient to generate a stable source of income to aid the livelihood. Robert Kiyosaki once said, “Don’t Work For Money; let money work for you.” A part of financial planning includes investment management with the end of goal of Creating Wealth. The simple guide to wealth creation is to start early, Invest in appreciating assets and invest for the long term.

The benefit of investing early in the career and staying invested for a long term is visible exponentially in the latter years of your investment cycle. This is the power of compounding.

Importance of Wealth Creation:-

  1. Regular source of income: Good investments in appreciation assets can provide a source of income (in the form of rent, dividend, interest) even after retirement. It helps to sustain the standard of living in times of emergencies, a sabbatical from work or also a health crisis. 
  2. Healthy Retirement: Building wealth is imperative for a healthy retirement. Wealth creation matters as it will enable you to fund the post-retirement years. 
  3. Goal-based investing: A goal-setting system helps to achieve targeted Wealth. It is always useful to have a goal in front of you to push harder to achieve the same. This works well with finances too. Goal-based investing is a matrix to measure the progress of wealth creation towards specific life goals like a world tour, marriage, children’s education etc. 

What is an Ideal Wealth Creation plan?

Since Wealth creation is a subset of the overall financial plan, the steps for the same are similar too, listed as under;

  1. Creating a budget
  2. Invest rather than just saving. 
  3. Understand the impact of inflation on saving.
  4. Investing in appreciating assets
  5. Becoming Debt-free.
  6. Cutting on unnecessary expenses
  7. Don’t mix insurance with investments

It would be safe to conclude that Financial Planning and Wealth Creation complement each other; it would be impractical to start wealth creation without proper financial planning. A financial plan allows you to identify the essential steps needed to take to be successful and profitable in a sustainable fashion. 

The famous investor Warren Buffet’s quote, “Failing to plan is planning to fail” itself draws out the crucial need to plan and reduce risks in your financial endeavours!

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