Why We Need To Create Financial Models?
Many people are concerned about their financial well being. They often improve their conditions by keeping track of their investments and maintain a reasonable budget. However, we should make sure whether our financial plan could help us target specific goals and we could achieve them, in a more efficient way. Modeling our financial future can be quite challenging and we should know how to fully realize our goals. In general, financial modeling is about accurate projections of financial factors based on sensible and informed assumptions. Based on a set of assumptions, we should be able to create a base model for our financial goal. We should be able to determine what the outcome should be. By using this tool, we should be able to achieve our financial well-being. Financial modeling is used huge corporate to predict their future financial situation. However, the benefit of this method for average consumers could still be quite tremendous. The most important thing is to know how to establish a proper financial model. Before creating our personal financial modeling, it is important to know about our internal financial situations and external factors.
Proper assumptions on financial models should be based on proper conditions in the past. In this case, we should have a rough plan on what we should take when bad things start to happen. Our financial model needs to cope really well to any inaccuracy of our original prediction. It’s true that being able to come up with perfectly accurate assumption is next to impossible. In fact, we could deal with a rude wake up call if we are being too optimistic with our assumptions. When creating a financial model, it is important that we also analyze risks. As an example, we should know what will happen if we lose our job sooner than expected.
In this case, we should know how long we could survive without our main career. Experts consider it appropriate if our savings are able to cover 6 months without employment. During that period, we have enough opportunity to find another job or other sources of income. There should be enough room in the budget to allow us deal with emergency needs. If we fail to do this, it’s possible that our effort can be derailed and our financial condition will be compromised. An effective financial model will allow us to answer any question related to possible unexpected conditions. It’s important to make sure that our financial future may become quite good, despite various risks that can affect us. Depending on optimistic, conservative and pessimistic projections, we may create different financial models. It means that when things have turned out to be really good, we could use steps recommended by optimistic projections. When things have become rather bad, we could use the pessimistic projection so we could adopt a number of measures to allow us manage financial recession and other issues that can affect us. By having multiple financial models, we could do things that may make sense.