What is financial planning, and why is it important?
Financial planning is the process of creating and achieving long-and short-term financial goals. It usually encompasses goal setting, budgeting, and investing and may also include asset protection, risk management, insurance and legacy planning.
Many people think that financial planning is only for those with a lot of money; however, this isn’t true! Financial planning is important for people on all incomes because it can help you make the most of your money and achieve your life and financial goals.
This article covers the basics of financial planning, how to create a financial plan, and why working with a financial planner can be helpful.
What is financial planning: the basics
The basics of financial planning involve creating a roadmap for your finances that considers your short-term and long-term financial goals. This roadmap is called a financial plan.
Your financial plan should cover:
· Goals in every area of your life : Your financial plan should encompass your goals in all areas of your life, not just money-related goals. That means setting financial goals and for your career, health, relationships, and leisure time.
· A budget: A budget is a tool that shows you how much money you have coming in and going out each month. Creating a budget can help you make informed decisions about spending and saving.
· Savings goals: Savings goals are the foundation of a sound financial plan. You’ll need savings to cover unexpected expenses, like a car repair or medical bill, and long-term goals, like retirement or buying a home.
· Investment strategy: Your investment strategy should align with your financial goals. For example, suppose you’re saving for retirement. In that case, you’ll want to focus on investments that offer growth potential with the right level of volatility and reward for your needs.
· A retirement plan: Retirement planning is one of the most important aspects of financial planning. It involves figuring out how much money you’ll need to have saved to live the lifestyle you would like later in life, whether working or not.
What Should I Include In My Financial Plan?
Financial planning is a highly individual task.
A single person without dependents will have different needs than a married parent.
In addition, someone who’s self-employed will need to approach financial planning in a distinct way.
Individual goals can also impact the financial planning process. Some people want to accumulate more savings and wealth than others.
A good to start creating a financial plan is to answer these questions:
- Think about your most important goals in life. What would make a great life for you?
- What actions would you need to take to make them happen in the short and long term?
- What money do you have or might need to create to support your goals? WHere or how might you create this income?
- How are you going to execute this plan today, tomorrow and ongoing? When will you review and revise your plan?
Answers to this are your starting points to a comprehensive financial plan looking at all areas of your life and financial future.
Sometimes your age and circumstances can also impact the financial planning process.
A homeowner, for instance, will need different types of insurance coverage than a renter.
Pet owners and parents must also consider guardianship in their estate planning.
Why is financial planning important?
Financial planning is important because it gives you a roadmap to follow for your finances. Without a plan, it’s easy to make poor financial decisions that can set you back from achieving your goals.
A good financial plan can help you:
· Stay on track with your finances: A financial plan can help you stay on track with your money and make progress towards your goals.
· Make informed decisions about spending and saving: A budget is a key part of a financial plan. It can help you make informed decisions about where to spend and save your money.
· Achieve your life and financial goals: Financial planning can help you achieve both your short-term and long-term goals.
· Build wealth: A well-thought-out financial plan can help you build wealth over time.
· Protect your assets: Insurance and risk management strategies are important in financial planning. They can help you protect your assets in an unexpected loss.
Do I Need a Professional’s Help?
For some financial planning tasks like budgeting, you might find you don’t need in-person help.
However, you may still find guidance from books and articles written by personal finance experts very useful.
Reading about experts’ tips is the minimum if you don’t know budgeting techniques.
For example, by reading and applying budgeting tips, you’ll learn how to set acceptable limits on various categories like housing, food and entertainment.
Through online articles and books, you could decide to apply the 50/30/20 budgeting method.
This method involves using 50% of your take-home pay for essentials, 30% for wants like vacations and paying down existing debts, and 20% for savings and investments.
Another method is the Kekeibo:
Kakeibo is a Japanese method of budgeting and saving money that can be used by people all over the world
Find out more about Kakeibo.
With more complex financial planning tasks like investing, expert guidance may be very useful to avoid making expensive mistakes.
Why work with a financial planner?
A financial planner can help you save for retirement, plan for large expenses, and figure out how to best use your money to reach your goals. They can also teach you about investing, budgeting, and other money management skills.
A financial planner can help you make faster progress, avoid the scammers and help you figure out how much is enough for what you want – even helping you understand you may already have enough!
Types of Financial Planning
The most common types of financial planning are
- Estate planning – a division of assets
- Tax planning – maximising tax returns or minimising tax payments
- Creating a budget – planning for income and expenses
- Retirement fund planning – determining how much to save and invest
- College fund planning – setting aside money for children’s college tuition
- Insurance planning – discovering what insurance policies and coverage to take out
- Investment planning – determining the right mix of equities in your investment portfolio for your goals.
Anyone with assets needs to participate in estate planning.
Assets can include property, accounts with money, and annuity funds.
You can designate that your assets go to heirs or next of kin.
Some people donate some of their assets to charity or sell their assets proceeds.
Tax planning helps people sort through various tax-related issues.
These can include figuring out how to fill out tax returns and claim tax returns.
While most of the other types of planning on the list are self-explanatory, insurance planning involves reviewing insurance coverage needs to prevent a crisis from becoming a disaster.
What’s the difference between a financial planner and a financial advisor?
A financial planner is usually someone who will help you create a comprehensive plan for your life and financial future.
This may include advice on saving for retirement, reducing debt, and investing for long-term growth.
A financial advisor, on the other hand, will typically help you manage your current investments. They may work with a range of clients, including individuals, businesses, and trusts.
Whoever you decide to work with, make sure you understand what you are paying for?
You are not paying someone to guess the future for you; no one can do that, but you may need someone to guide you on making the right financial moves.
It can be tricky, but you need to understand who is trying to help you and who is just trying to sell you something for a commission?
You can work with a regulated financial advisor to SELL you financial products or a financial planner who can guide you on how to make these decisions yourself at a fraction of the cost.
This is what we do here at Financial happy to equip you with the knowledge and skills to become financially free without the need for expensive sales or commission fees.
Working With Financial Experts
Various types of financial planning needs may dictate that you work with various financial experts or professionals.
Some specialise in providing investment guidance according to your goals and needs.
Other experts specialise in budgeting, taxes, or estate planning.
Financial planners can offer advice and guidance in several different areas.
But while financial planners and experts can provide guidance, it is up to you to follow it.
You must also be honest about your financial situation (lots of credit card debt?) and objectives.
A good financial planner can help you narrow or define those objectives.
However, it’s not their job to come up with a set of goals for you.
FAQ: What is financial planning?
How do I set up my finances?
One of the best things you can do for your financial future is to get in the habit of budgeting and saving. Start by figuring out how much money you have coming in each month, and then figure out what you need to spend that money on. Set aside some money each month to save for the future.
If you’re unsure where to start, there are a lot of great resources online that can help you get started. There are also lots of great apps and software programs that can help make budgeting easier. Whatever method you choose, stick with it and be patient – it will take time to get your finances in order, but it’s worth it in the long run!
Where do I start with financial planning?
First of all, figure out what your goals are in every area of your life.
What actions are you going to need to take to make them happen?
Figure out your money by working out where you are now and where you need to be.
If there is a gap, start working on a plan to create more money and assets that provide you can income.
Then start executing your plan, review and revise as you go.
What is a good example of a financial goal?
A good example of a financial goal is saving up for a down payment on a house. Other financial goals include saving up for retirement, establishing an emergency fund, and paying off debt.
One important thing to remember when it comes to financial goals is that they should be specific, measurable, attainable, relevant, and time-based (SMART).
This means that you should have a clear idea of what you’re trying to achieve, how much you need to save to reach your goal, what steps you need to take to get there, why this goal is important to you, and when you want to achieve it by.
What financial goals should I set for myself?
Everyone’s financial goals will be unique to their situation. However, some general guidelines can help you set financial goals for yourself.
First, look at your overall financial picture and identify areas where you could improve. Do you need to save more money? Get out of debt? Build up your emergency fund? Once you’ve identified areas for improvement, you can start setting specific goals in those areas.
For example, let’s say you want to get out of debt. A goal might be to pay off your smallest debt first, then work your way up to the larger debts.
How do I start a financial plan?
Financial planning is the process of setting and achieving financial goals. It involves creating a budget, investing, and saving money.
The first step to starting a financial plan is to set some life and financial goals. Then gather your data, including your income, debts, expenses, and assets. Once you have a clear picture of your finances, you can start taking action to reach your goals.
Some common financial goals include
-Paying off debt
-Saving for retirement
-Building an emergency fund
-Investing in stocks or real estate
-Saving for a down payment on a house or car
– Planning for college costs
After you have selected your goals, you need to figure out how much money you will need to create to make them happen asap.
What does financial planning involve?
Financial planning involves the process of setting goals, assessing one’s current financial situation, and developing a plan to achieve those goals.
It includes creating a budget, managing debt, saving for emergencies and retirement, investing, and protecting one’s assets through insurance.
A financial plan should consider factors such as income, expenses, taxes, inflation, and risk tolerance.
It should also be flexible enough to adjust to changes in one’s life circumstances.
Ultimately, financial planning helps you and your family make informed decisions about their financesand lifestyle to achieve their long-term goals.
Final Thoughts on What is financial planning
Strategising your life and finances can include various areas and concerns, such as budgeting, creating an emergency fund, insurance and investments.
While everyone’s financial planning looks different according to individualised needs, some similarities exist.
For example, nearly everyone needs a will and needs to plan how their assets will be distributed after passing.
Some people won’t need to include college funds in their planning process.
Others will have a hand on budgeting but need assistance with investments.
Likewise, those with different types of assets like homes may have more insurance needs than those who rent.
Check out our essential life planning process If you want help with your financial plan,