What Is Financial Planning?
A financial plan acts as a guide for your money and helps you achieve your goals. Financial planning is about building a way to help people achieve their financial goals. You can do financial planning on your own or with the help of a professional.
Save more, spend smarter, and make your money go further
Financial planning is a step-by-step strategy to meet your life goals. A financial plan helps you go through your life’s journey. It enables you to control your expenses, incomes, and investments to manage your finances. Financial planning guides you towards making practical decisions about spending and saving, so you can achieve stability and reach your goals.
Money is a cornerstone of our livelihood, whether that’s ensuring we have food on the table and a roof over our heads, or saving for retirement. As such, managing your money wisely is essential. That’s where the practice of financial planning comes in.
Financial planning can help you reach your financial goals including getting a bigger home, a new car, improved career training, a family vacation abroad, higher education for your children, and most importantly, being independent while working and after retirement.
Successful financial planning demands identifying and setting up priorities referred to as money management. If you’re not sure where to get started, don’t worry, we have you covered. Keep reading to learn all about financial planning basics, or use the links below to go straight to a specific section.
- What Are the Benefits of Financial Planning?
- What are the Key Elements of a Financial Plan?
- 7 Tips for Financial Planning
- When Should I Hire an Advisor to Help with Financial Planning?
Financial Planning Definition
By definition, financial planning is the process of assessing your current financial situation and taking that information to manage your money in a way that allows you to achieve your goals and set yourself up for a successful future.
Financial planning is a multi-step process that requires you to evaluate the big picture of your financial circumstances. You have two options when financial planning, you can do it yourself, or you can get help from a professional financial advisor. Either way, financial planning is an essential aspect of money management and long-term financial security.
What Are the Benefits of Financial Planning?
There are many benefits of financial planning. It allows you to:
- Increase your life savings
Part of any solid financial plan is creating a strategy for your savings. When you make a financial plan, you get a good understanding and insight into your earnings and expenditures. You can track your costs and cut them down knowingly. With this information, you can then decide how much discretionary income you have to save or how you can alter your current budget allocation to increase how much you’re saving.
- Improve your standard of living
Many people think they would have to lower their standard of living if they’re making an effort to make better financial decisions. On the contrary, you typically don’t need to compromise your lifestyle with a good financial plan. Your goals are very much achievable while living in moderate comfort.
- Be prepared for crises
Creating an emergency fund is a critical component of financial planning. For many people, the goal is to have at least six months of your monthly earnings stashed away for emergencies. This way, you will not have to worry about scrambling to come up with the funds you need when an unexpected expense arises or you find your financial circumstances have drastically changed overnight . The emergency fund will help you handle various expenses on time and with much less stress.
- Enjoy peace of mind
With readily available sufficient funds, you can cover your monthly costs, invest in your future dreams and goals, and spend a little lavishly on yourself and your loved ones without worrying about money. Financial planning will help you organize your money expeditiously and enjoy peace of mind that your bases are covered. Don’t be upset if you’re not quite there yet—all in good time. Financial peace is not far away once you set your foot on the financial planning route.
How Do I Make a Financial Plan?
For financial planning to be effective, it’s important to follow the right process. To create a sound financial plan, be sure to:
- Evaluate your current financial situation
To get started, you need to have a good understanding of the state of your current finances, specifically when it comes to your:
Completing this first step will give you a good understanding of the condition of your finances and ways to improve.
- Write down your financial objectives
Write the different financial goals that you wish to achieve—both short term and long term. Ensure that your goals are clear and specific.
For example, here are some attainable goals:
- “I want to purchase a car in the next three years”
- “I want to buy a house in the city in the next two years.”
- “I will save 10% of my income to go toward a down payment this year.”
The more specific your goals, the better you can plan for them. These goals will act as a guide for you on how you lay out your plan and how you allocate your money.
- Look for different investment opportunities
Multiple investment possibilities are available for investors. You can pick from nearly thousands of projects and schemes in the mutual fund market. Various investment avenues allow investors to accomplish different goals. For example, stock or equity funds are suited for long-term plans like retirement planning, education, etc. If you are interested in a fairly steady income and risk-averse, you might want to invest in debt mutual funds. Similarly, the ELSS (Equity Linked Saving Scheme) fund is ideal for saving tax. Financial experts have emphasized the importance of mutual funds when it comes to investing. Investing in these funds regularly over a prolonged period can help you fulfill your goals and objectives.
- Carry out the right plan
When financial planning, there are several factors you should take into consideration, including:
- Your age
- Risk tolerance
- Current investments
- Retirement plans
Financial plans are highly customized to your situation, so you shouldn’t follow a one-size-fits-all approach. Instead, take recommendations and tailor them to fit your circumstances. It may take some time and effort to get all the elements of your financial planning figured out, but doing your due diligence will only benefit you in the long run.
- Monitor your financial plan consistently
Financial planning doesn’t just stop once you’ve put your plan in motion. You need to keep an eye on the progress toward your goals and may need to pivot as your circumstances and desires change. Some important things you should keep an eye on to see how your plan is working out for you are:
- How much you’ve saved
- How close you are to reaching the goals you’ve set
- How your investments are performing
- Where you’re falling short
Often things like major life changes impact our financial planning and require us to go back and reassess. For example, your financial preferences will likely change if you have a child, so you will need to adjust the expenses and objectives according to that. Or, if you decide you want to make a big purchase—like real estate—you’ll likely need to adjust your previous plan to help you achieve that goal.