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The Importance of Financial Planning – Bringing it All Together

  • Branch Manager - Sliema
  • Blog post submitted on 5th April 2019
Importance of Financial Planning

If we want to live a good healthy life, we seek to follow a balanced diet, do regular exercise and avoid bad habits. When it comes to taking care of our personal finances, we need to plan to keep ourselves financially healthy. Reality is that we need to do an additional effort to maintain these two important life goals.

I observe that sometimes we find personal finance as a boring or too complicated subject to think and talk about. If it comes up during a conversation, we tend to stay away and pretend we’re not interested. If we’re on social media, we tend to skip blog posts related to the subject. An example where one can notice the lack of interest on the subject, for instance, when we go to a bookstore, observe how many books one can find on the shelves related to personal finance? In most cases, very few or nothing to say the least. Why we have such a passive approach towards the subject? In my opinion, we just don’t want to talk about money, maybe because for a reason we tend to associate what we read or hear with our personal financial matters that we’re not happy with and this may create an emotional concern. So, ultimately the idea of having a financial plan that is important not only for the present but also for the future may be a long shot for us.

Now I’m going to define financial planning and explain the building blocks required to form a good plan that I hope it will provide a clearer insight of its importance and instil more confidence while clearing some misconceptions one might have about the subject.

The concept of having a financial plan is to assist in establishing short and long-term financial objectives and develop a realistic plan to meet such goals. The following brief insights explain why there is the need of understanding the scope of financial planning, and where you couldn’t manage alone, with the assistance of a professional financial advisor, will surely get where you aspire to be.

  • Managing income from your salary and other sources, such as returns from investments, pension benefits, etc., through planning, is important. Income is the lifeblood that keeps your economic engine working. So, by managing it you will understand more how to save part of your income, budget better for monthly expenditures and pay tax efficiently;
  • The success of how you’re able to maintain financial fitness is by increasing your monthly cash flow. Your hard-earned cash which flows it needs to be maintained by lowering your spending through careful budgeting and through tax planning;
  • It’s not how much you earn but how much you’re able to keep that matters. Through paying yourself first by taking a percentage of your income immediately as it comes in, you’re saving capital that can be invested to increase your wealth and provide more financial comfort. It also provides the liquidity needed for a ‘rainy day’;
  • Unexpected events can happen in life. Unfortunately, they come when they are least expected. So, we need to be prepared for such outcomes. From what you earn, you need to make provision to have an adequate insurance policy cover that protects you and your loved ones, hence providing more piece of mind;
  • Your finances will remain healthy if you stay out of debt as much as possible. If you’re borrowing to buy assets that produce income, that is good debt. However, increasing your debt on your credit cards to sustain your lifestyle, that is considered bad debt. So, you need to distinguish between the two. Only through careful budgeting you’re able to eliminate the use of credit cards and have more control on your debt;
  • Having a good standard of living is important. It creates a good life balance and a positive feeling that the sacrifices and pressure we go through to maintain such standard, is worth. So, an adequate insurance cover to replace any lost income in case the family breadwinner is unable to work is a guarantee that the standard of living is maintained;
  • To be financially literate by having knowledge about money is key. Only when you set measurable financial goals, working towards achieving them and reviewing each decision taken will allow yourself to understand better the meaning of having total control over your financial lifestyle;
  • Assets are part of your wealth building plans, such as property, investments in marketable securities and businesses. Even your job or profession is an asset but in a different way. These are the workhorses that produce your needed cash flow. Sometimes to acquire assets carries liabilities that need to be cancelled out to determine the real value. Liabilities are then settled through cash flows that the same assets produce. Through financial planning and understanding the key drivers of how best to utilise an asset will avoid building a portfolio that won’t be a burden in the future;
  • No one knows what the future beholds. The mantra of living for today without thinking for tomorrow is a false conception. When you grasp the financial planning concept you will realise that having a long-term plan that goes beyond your time to retirement, such as contributing to a private pension scheme, not only provide immediate benefits through tax incentives by the state but can assure that your lifestyle beyond retirement won’t be disrupted.

Finally, seeking advice to put you on action mode, to kick-start your plan and be able to maintain it is critical to achieving your financial goals. A trustworthy advisor can meet with you to assess your current financial circumstances, develop a comprehensive plan customise for you and ultimately guide you through on your journey with ongoing advice.

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