Why does one need a Financial Plan

You are often besieged by a variety of people who offer ‘financial plans’. Most visitors to banks, particularly the private banks, encounter ‘financial planners’. While there could be different views on the usefulness of these planners, there is no doubt about the importance of a Financial Plan as such. Let us look at the reasons for this.

I would start by introducing the Eisenhower Matrix. This is also called ‘Urgent-Important’ matrix. Like any useful matrix, this provides a 2×2 classifications of anything that one needs to – in the dimensions of Urgency and Importance.

A typical human is naturally equipped to deal with urgent stuff. In any urgent situation, our body produces hormones that get us acting. The actions may or may not be appropriate; but they happen nevertheless. In a related way, most humans are not well equipped to deal with non-urgent stuff. We tend to procrastinate on them, or at the least file them away in our mind to be done later. Often, this ‘later’ does not happen at all.

On the dimension of importance, we would like to think that we can naturally focus on important stuff and ignore the unimportant stuff. However, we often focus on the easier stuff and tend to postpone difficult stuff. If an important activity happens to be easy, this tendency works out well. Alas, most important activities also end up having a degree of difficulty.

It just so happens that any decent financial goal – even something as basic as building an emergency corpus – falls in the Important, Less Urgent box. As we just read, most of us are not equipped to naturally deal with these items. The only way that we would get them done is by planning for them.

Since we always have a collection of financial goals – ranging over few to many years – it is essential that we have a Financial Plan. This plan has to be personalized for our goals and our attitudes and behaviours. In later posts, we would look at important parts of a Financial Plan, and whether we can create one ourselves.

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Additional Reading:

• Eisenhower Matrix
• Comprehensive set of articles on DIY financial plan – freefincal DIY