Why financial planning?
What are the pros and cons of medium term financial planning?
Financial planning helps you avoid the excesses of short term passion and longer-term prudence.
However, weak assumptions and unexpected events can invalidate a plan.
Even a rough plan can give you an idea of your direction of travel.
Every financial decision you make today, whether it be large or small, will affect your medium and long term finances. Therefore, planning your finances should enable you to assess the impact of today’s decisions on your medium-term outlook.
Passion gives you wholehearted living today, while prudence ensures your longer-term security. An over-emphasis on either (hedonism and miserliness, for instance) can be dangerous. Planning for both short term passion and longer-term prudence helps you balance the two.
On the downside, medium-term financial planning relies on your assumptions about everything from income, expenditure, health, returns etc. Weak assumptions (or events) will result in a less than useful financial plan. However, a comprehensive medium-term plan based on reasonable, sound assumptions will give you an idea of your direction of travel. It will indicate whether you can be more passionate today or need to be more prudent for the future. Financial plans can have a significant impact on your life, which is why your plan requires regular reviews, at least annually.
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