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Financial Planning

What is financial planning

Financial planning is an organized assessment of one’s financial situation in order to plan out actions and approaches needed to reach one’s financial goals. This can include something as simple as figuring out how to make your paycheck last until the next one and budgeting for unexpected expenses. But it can get as complex as planning retirement, buying life insurance and investing in the stock market and other financial products.

Financial planning ideally takes every aspect of your financial life into account. Here are some of the issues and topics you’ll need to look at as you asses your relationship to money and the actions you need to take to meet your goals:

Cash flow management
Risk Management
Tax Planning Management
Investment Planning Management
Estate Planning Management
Insurance Planning
Debt mitigation
Saving for middle-term goals
Inheritance
Retirement
Charitable giving

While making your first financial plan is a big investment of time and energy, it isn’t an end point. It’s more of a carefully built foundation that you can use to grow your financial health through constantly monitoring and tweaking the plan to accommodate your changing life circumstances and needs.

Think of financial planning as more of an ongoing process than as an event that you do once and wash your hands of. If you’re doing it right, you’re regularly planning and constantly monitoring your financial situation.

How to create a financial plan

Establishing a solid financial plan starts with thinking about what you want your future to look like and then involves looking at how your income can support those goals. Here are some basic steps for financial planning that can help you approach the process:

1. Set your goals:

You can’t plan your financial strategies until you know what you need or want your money to do for you. Ask yourself open-ended questions: Do you want to buy a home? Do you want to have a family? Do you want to travel? When do you want to retire? What do you want out of retirement? Write down your answers with as much specificity as you can muster.

2. Quantify your goals:

Estimate your cost of living in retirement and how many years you might need that amount after you retire. Tally up the cost of having the children you want to have or buying the house you’d like to buy. There are various ways of quantifying all these things; the trick is to get a tangible sense of what money you need for each of the things you want to do.

3. Record your financial information:

Put all of your data in one place. This will include items like your monthly income and details of your monthly expenses, the size of your overall debt and the interest rates on your debts, the amount of equity in your home and the size of your mortgage, your savings and investments, and the premium and value of your life insurance plans. The things in this list will vary depending on your situation and the details of your financial life.

4. Make a plan:

Now it’s time to analyze your financial situation to judge what you’ll need to do in order to meet the goals you’ve established. If your income won’t stretch to allow you to amass the savings you’ll need for certain things, think about ways you can increase income or decrease spending in order to have more disposable cash to save for the future. Your plans should account for immediate, mid-term, and long-range goals.

5. Take action:

Start following your plan, including daily budgeting, contributing to savings, and paying down debt systematically. You may not hit every mark perfectly each day or month, but as long as you continue to make consistent progress toward your goals and continue to improve your accuracy, you’re on the right track.

6. Monitor and reassess:

Financial planning is a dynamic process—you have to constantly keep abreast of changes in your situation or your goals and tweak your plan and execution accordingly. Life has a tendency to shift and change, bringing your new challenges and fresh goals; make sure your financial planning changes with it.

This process can be as simple or as complicated as you want to make it. It’s a good idea to make it sufficiently robust that you have a full picture of your financial situation; otherwise you’re not playing with a full deck.