What is Financial Planning?
Financial planning means process one takes to ensure that one’s current financial well-being is comfortable, that one is not stressing about money now or into the foreseeable future, and maintaining a strategy to reach one’s long-term financial goals.
There is no one fit all strategy, and therefore everyone should develop a roadmap for themselves that suits their financial needs.
Why You should Have a Financial Plan
Gallup study report shows that “Only 30% of U.S. households have a long-term financial plan.”
This rate is very abysmal considering how important it is.
The reason could be that many people do not prioritize their financial plans, say they will consider it later, don’t know where and how to start, or possibly do not realize how important a financial plan is for them.
I have no doubt that the above financial planning definition is beginning to awake your consciousness to why you should have a plan in place.
However, below are more reasons you should consider having financial plan.
Financial planning helps you understand your current state of your finance. Starting from your income to expenses, how you’re spending money, savings, investments, etc.
Enables you set various financial goals for yourself and your family. For instance; how much you want to be saving, what to save for, what you want to invest for retirement, how much you want to spend etc.
It will help you develop a timeline on goals, if they are realistic, and insights to help you stay on cause.
Financial planning will help you understand your cash flow and spending habits, so you don’t have to manage your finance as it comes to your mind.
Financial planning will help correct money mistakes you are making presently.
It can as well show your financial risks, which you may not have knowledge of all this while.
Financial plan will help you build wealth as your plan keeps you informed, making better savings, spending, and making robust investments decisions that grow your net worth.
Finally, when you have financial plan, you become more knowledgeable with your finances and more savvy with your money.
Step-by-step Guide to Personal Financial Planning
1 Set Financial Goals
The first step to take in your personal financial planning is to set your financial goals — what you’re targeting to achieve with your finances.
2 Create a Budget
Having gotten a clear idea of what and what you want to save, invest and spend your money on, the next is to create a budget. Decide on how much you are to save, invest or spend and time. The timing can be daily, weekly or monthly.
3 Plan for Taxes
Planning for taxes ahead of time can go a long way toward helping you keep more of your money next year. Think through potential income tax credits and deductions and make provisions for them
4 Create Emergency Fund
Emergency fund is fund set aside to unexpected expenses. It’s important to prepare for the unknown. All the planning in the world won’t help if life throws you a curveball and you’re financially unprepared.
5 Manage Debt
Understanding and managing debt is a critical component of creating a financial plan.
6 Get Insurance Policy
Get insurance cover against the unexpected. Life they say is what happens when we are busy making other plans. Insurance helps to handle such occurrences.
7 Plan for Retirement
Even if it’s a long way off, think about what you want your money to do for you when you retire, and create a plan to make it happen.
8 Invest Beyond Your 401(k)
To reach your mid- and long-term goals, take your savings strategy and put an engine behind it. That’s what investing can do.
9 Create an Estate Plan
You don’t have to be wealthy, old, married, or a parent to have an estate plan, that as well states who will make financial and health care decisions for you if you are incapable of making them yourself.
While you can handle your personal financial planning with spreadsheets or hire a financial planner, there are free financial planning software that make your financial planning much easier and more organized.