These can seen as the fundamental Laws to the Importance of Financial Planning
The basic premise of financial planning is that there are certain fundamental laws of money and finances over which you have little or no control that can either work to your advantage or your disadvantage depending on what actions or in actions you take.
They are very simple facts that, when understood, underscore the how important financial planning is.
Here are five simple facts on importance of financial planning:
There Is a Cost to Waiting
The two key elements of financial planning are time and money.
You need both in order to secure your most important financial goals.
The fact is that the more you have of one, the less you need of the other.
Conversely, the more one is wasted, the more you will need of the other.
Most people start out with more time than money which is why it is important to start a savings or investing program early.
Here’s a simple example:
A person begins to save for retirement at age 28 by contributing $500 a month to a retirement plan.
After 30 years of accumulation at 8%, the retirement fund will have grown to $283,000.
If that same person waits just 2 years, to start saving for retirement, the fund will have grown to only $238,000 at the same point in time.
The two-year wait cost $45,000!
Death and Taxes are Certain
Yes, it sounds like a weathered cliché; however, there is no more truer statement of life’s certainties.
Although you can’t control either, there are many ways in which your finances can be planned to minimize their impact on you and your family’s financial situation.
What Goes Up Will Come Down
Market and economic cycles occur with almost certain regularity.
The problem is that it is difficult to forecast the beginning or end of these cycles, but one thing is certain, the markets always go up, and they always come down.
The good news is that, historically, the general, long term trend for the financial markets has been up.
The bad news is that it is nearly impossible to time the ups and the downs, which is why those who invest with a long term horizon will usually fair well.
People Are Living Longer In Retirement
It is a fact that, people today are living longer than generations past.
A person who reaches the age of 65 today is very likely to attain the age of 83 which is about 20 years older than the generation of the early twentieth century.
The financial planning implications are serious for people who fear that they might outlive their retirement income.
Your Money Will Be Worth Less In the Future
Inflation should probably be added to death and taxes as a certainty of life.
The issue is generally not if there will be inflation, but how high will the rate climb.
Since the 1990’s the inflation rate has kept relatively low, but, as pointed out above, what comes down always goes back up.
Even with low inflation, the value of your money will erode over time.
At just 3% inflation, a basket of consumer goods that costs $500 in 2010 will cost over $1400 in 2040.
If your money at work is not keeping pace with the rate of inflation, you can lose a significant amount of purchasing power.
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