Role Of Personal Financial Planning - What's The Deal?

Essentially, the role of personal financial planning (or having a good personal financial plan) means involving the following areas: budgeting, savings and investment, insurance, management of "big-ticket" items, cash-flow management.

Any good financial education book on personal financial planning will tell you that a good personal financial plan starts with budgeting, and it is true. Budgeting allows you to decide how much you can spend and save. Of course, the main objective is to make sure that your expenses do not exceed your income. This will create a surplus that can be used for your savings and investment. Remember - budgeting is a must and is a start of any good personal financial plan.

Savings and investment are similar, yet different in its objectives. Both savings and investment 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 the both lies mainly in their objectives and time frame. Essentially, savings are meant to be "liquid" and can be withdrawn at a moment's notice or within a short time-frame.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. Investment 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 should definitely be part of a robust personal financial plan. A big part of the role of personal financial planning is to ensure that one has the means to carry on living in the event of some unfortunate events, both big and small. In essence, insurance provides a safety cushion to provide some form of financial help when one meets with events like accidents, disabilities or illnesses. One major contribution of insurance is that it also provides peace of mind, knowing that financial help is at hand in the event things do go wrong. This kind of peace of mind leaves one with the energy and confidence to move forward in life.

You should consider carefully when purchasing "big-ticket" items. They could really ruin your personal financial plan. While 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 a good personal financial plan is never to buy something you cannot afford. That's where the role of personal financial planning really lies - helping one live within his means.

Buying things on credit is usually a bad idea. It really goes against the spirit and role of personal financial planning. 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. Remember the lesson on budgeting! 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. As a side note, having enough savings first before buying stuff will do wonders to your stress level as well.

There are of course exceptions to this rule of thumb on personal 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.

So those thngs mentioned summarise the role of personal financial planning. Ignore personal financial planning at your own peril - the price to pay could be your financial freedom!