Demystifying Financial Planning Part II: Why Do I Need a Financial Plan?

Financial planning is simply the process of properly managing your money so that you can handle your daily expenses, achieve your goals, and prepare for your future. Philosophically, money may not be the most important thing in life; however, realistically, we know that our finances have a direct impact on our current lifestyles, our health, how we raise our families, and how we will spend our golden years.

Many of us intend to make a plan, but it’s easy to procrastinate with financial planning because it may not seem pressing compared to finishing a report for work or changing a dirty diaper. We must stop procrastinating because timeliness is actually crucial to our finances and to our futures.

The reason that timeliness is so important to financial planning is because of a process called compounding. Compounding means that not only does your original investment grow, but any gains on your investment also continue to grow over time. In other words, the money you first invest will earn interest every year, and then that amount you earned in interest will also earn its own interest the next year. The interest you accumulate may not seem like much at first, but over time, its significance increases exponentially.

The graph below shows the importance of saving and investing as early as possible.

Assume a long term expectation of returns in the stock market of 7% based on real GDP growth (2.5%) plus inflation (2.5%) plus dividend yield (1.8%). Source: Fortune Magazine

Due to the effects of compounding, you can make a financial plan and increase your earnings through investments, even with a small amount of money. I mistakenly believed that financial planning and investing were activities reserved for wealthy people, and I am afraid that many women are under the same misapprehension. Remember, you may be getting by and making ends meet now, but you need to be prepared for life’s surprises and for your retirement.

In my next post, I will examine the benefits of consulting a financial advisor and challenge the myth that you must be wealthy to hire a Certified Financial Planner (CFP). Just as you would consult a doctor, a lawyer, or a dentist for their professional opinions, you shouldn’t be afraid to seek the help of a professional when it comes to your finances, a defining aspect of your future.

As I continue my series on Demystifying Financial Planning, I welcome your feedback and questions. I would also love to hear about your own experiences with saving and investing!

[Disclaimer: The information, materials and data provided on this website are for general information purposes. It is not investment advice nor can it take account of your own particular circumstances. If you require any advice on investments, you should contact a financial or other professional adviser. No material in this website is an offer or solicitation to buy or sell any investments.]

Tagged as: finance, Financial Planning, financial plans, Manisha Thakor, money, online financial planning, what is financial planning, women & co, women & finance, Women & Money

{ 2 comments… read them below or add one }

1 Sam Tornatore July 25, 2011 at 6:40 PM: Sometimes we procrastinate because we have the wronmg goals in the first place

2 Sarah August 18, 2011 at 9:07 PM: More, Caroline! I’m excited for this series of articles.