Financial Planning Rewards

Any change in the life of an individual changes his personal financial planning process.

There are three long-term rewards of personal financial planning – improved standard of living, wise-spending patterns, and wealth accumulation. The three rewards of personal financial planning are 

• IMPROVED STANDARD OF LIVING
• SPENDING MONEY WISELY 
• Current Needs
• Future Needs
• WEALTH ACCUMULATION

IMPROVED STANDARD OF LIVING

Personal financial planning helps manage one’s resources and control undue expenses.Standard of living represents the quality of a person’s lifestyle.A person can maintain his/her standard of living or even improve it by planning efficiently his/her income and expenses and then provide for investment to meet the future contingencies. Quality of  life is tied with material as well as non-material items. Even money for health,education, entertainment contributes to the quality of life.Increasing of two-income families increases spending capacity and also the aspirations for future requirements.As the income increases, the need for planning also increases,so that money can be managed in a wise manner.

SPENDING MONEY WISELY 

Spending money wisely is another pay-off of personal financial planning. An individual 

always has two options with him/her with respect to his/her hard-earned money –spend it or save it for the future. Sometimes, it is important for an individual to forgo his/her current needs to save for the future. Thus, if money needs to be spent, it should be spent wisely. Put differently, one should think of what manner of spending or what type of spending in what combination – gives the most satisfaction for each rupee spent.

Current Needs

The current needs of a person are dependent on the level of spending on the basic

necessities of life such as food, clothing, shelter, etc., and his/her propensity to

consume. Everybody spends money on these basic necessities of life, but the quantity

and quality differ from person to person. People can easily get influenced by various

attractive schemes for buying expensive consumer durables, clothes, large houses, etc.,irrespective of their current income. Personal financial planning thus helps in making a person realize that he/she has to strike a balance between his/her current expenses and future requirements.

The average propensity to consume refers to the average inclination of an individual to spend a rupee of income on the current needs than to save for the future needs. People with higher inclination to consume are said to have a higher average propensity to consume. Some people tend to spend almost equally on all the current needs, while some others overspend on some needs and are extra cautious about others. As the income of the person increases, the propensity to consume decreases. The proportion of money spent on current needs as a proportion to the total income falls. It is not uncommon to find some people with a lower income range spending more on current  needs, even in absolute terms, compared to another class of persons in a higher income range. This is dependent purely on the individual attitudes of people.

Future Needs

Future needs can be taken care of by allocating a part of the current income for saving or investment. This allocation of a part of the income for the future depends on the current income of the individual. If a person earns less, it may not be possible for him/her to allocate a sizeable portion for the future requirements. But as the income of the person increases, he/she can devote a bigger chunk of his/her earned income to saving or investment purposes.

At the same time, it should be said that irrespective of the level of income, it is

imperative for a person to save for the future, for any financial plan to succeed.

Individuals need some savings for the later years of life. There may also be other needs that call for a lump sum to be spent later, like for the college education of a child. It thus becomes necessary to plan ahead in order to meet these huge expenses. Saving for such needs may also require sacrificing some of the current needs in order to be able to meet these future needs comfortably.

WEALTH ACCUMULATION

Personal financial planning plays an important role in accumulating wealth. There is a 

general tendency among people to accumulate wealth, which may be in the form of

tangible or intangible assets. Personal financial planning can help a person to formulate a plan for investing in assets at the right time, without disturbing the current income. Assets can also be subdivided into earning assets and tangible assets. Buying a car is a long-term investment, but the asset does not generate any income. On the other hand, investment in fixed deposits, bonds, and stocks generates income. They are known as earning assets. Thus, an individual has to decide whether he/she should invest in earning or tangible assets. Again, within tangible assets, he/she has to select between those that generate income, like a commercial real estate, and those that result in only capital appreciation, like land. His/her decision will help chalk out his/her future strategy for investment planning. The goal of most people would be to accumulate as much wealth as possible while maintaining the desired standard of living.