Today, financial stress is a major cause of concern among people due to rising expenses, lifestyle inflation, EMIs, loans, etc. With proper financial planning, they can plan their income, expenses, assets, liabilities, and investments more proactively so that they not only achieve mental peace, but at the same time achieve financial freedom and achieve their goals.
The need for financial planning has mainly increased over the years due to inflation (including lifestyle inflation) and consumerism.
Inflation + Lifestyle Inflation: As we all know, inflation is the defined term for a persistent increase in the general price levels of goods and services in an economy. We are all aware that the price of raw materials has increased over the years and in all likelihood will continue to increase. In other words, the value of money gradually decreases. Also, there is something called lifestyle inflation which is on top of normal inflation. Perfect example of lifestyle Inflation is as follows: Previously, we only spent Rs 50 -100 for a movie ticket. But today the price of a multiplex cinema ticket has risen to Rs. 250-400 plus the cost of popcorn bins will push it past Rs. 600.
Consumerism is the main reason for having financial planning because today people consume a lot of goods and services. With lifestyle expenses increasing daily, having a solid financial plan is imperative.
10-15 years ago there was no need for financial planning because;
|DF rate||8-10% approx.|
|EPF/PPF rates||10% approx.|
|Inflation||4% -6% approx.|
There was no acute need for a financial plan 10-15 years ago, as traditional products like fixed deposits and ETHs/PPFs had the potential to create long-term wealth.
Today, the above numbers have changed.
|FD rate||5- 6% approx.|
|EPF/PPF rates||8.1% approx.|
|Inflation + Lifestyle Inflation||8-10%|
However, over time things reversed; currently, interest rates on FDs and EPFs range from 6% to 8%, while inflation + lifestyle hover around 8-10%. As a result, it has become increasingly vital to develop a personal financial plan in light of changing circumstances.
The traditional definition of savings is: Income – Expenses = Savings
But practically in the current scenario taking lifestyle inflation: income – expenses = zero or EMI
So, to change the equation above: you have to adopt a change in behavior, if people really want to succeed in reaching their financial goals on time; Income – Savings/Investment = Expenses
Spend what’s left after saving and investing to reach your financial goals.
This small change in behavior will lead to a sea change in the overall financial planning and wealth building journey for investors.
Therefore, financial planning and goal setting will set a roadmap for investors in terms of achieving their short, medium and long term goals and thereby ensuring an Emi-free and stress-free life.