Have you ever asked yourself or someone else “what is financial planning?” It is a common question and most people consider having a good plan in order to gain financial control and live a comfortable life. Continue reading to know how you can work on your personal financial planning and achieve financial security.
In this guide:
- What Is Financial Planning?
- Who Needs Financial Planning?
- How Important Is Financial Planning?
- How Should I Prepare a Financial Plan?
- What Should I Do After Creating a Financial Plan?
FAQs: Things to Know About Financial Planning
What Is Financial Planning?
Financial planning is the evaluation of one’s status in terms of his finances and the preparations needed to maintain or improve this status. This is done to understand an individual’s current finances and to come up with specific actions on how to attain financial security. A good financial plan will help an individual manage his finances wisely and productively.
In determining a financial plan, both the positive and negative aspects of one’s finances should be considered. Among the positives include income or earnings, ownership of cash, and other financial investments. Meanwhile, among the negatives are loans, debts, and other forms of credit.
Who Needs Financial Planning?
Everybody needs financial planning. Some people might think that only those who are wealthy need to do a lot of financial planning. For obvious reasons, those with more assets require a lot of financial planning to do in order to properly manage their wealth. But in reality, even those who are not so well-off also need to have a financial plan especially if they wish to gain better financial control and increase their wealth.
Also, doing a financial plan is not restricted to a particular age limit. Again, anybody can — and has to — have some form of a financial plan but naturally, the need to work on one intensifies as we age.
How Important Is Financial Planning?
Financial planning is important because it will allow an individual to attain the financial control he wishes to have in the future. Most experts would suggest that people start creating their financial plans at a young age. By youngsters, we mean students who may not have enough money or assets as they are still dependent on their parents or guardians. Learning how to manage their limited finances at an early age helps them develop the right financial discipline when they reach adulthood.
Adults have to continuously work on their financial plan to manage their finances properly and maintain a good financial standing. Doing a financial plan is not a one-time thing, as plans may change depending on various circumstances. Adults have many expenses so having a good financial plan helps them achieve financial control and manage spending in a better way.
Also, working on a good financial plan will help prepare for retirement and financial security when they reach old age.
How Should I Prepare a Financial Plan?
In order to come up with a financial plan, you may follow these effective steps:
1. Set goals and priorities.
Identify what you want to achieve with your finances:
- short-term goals, such as buying a car or paying off debts
- long-term goals, such as buying a house or preparing for early retirement
Whatever your goals are, make sure to identify what you want to achieve first, and what you want to pursue at a later time.
In setting your goals and priorities, do not just take notes mentally. Write down these things on paper to help you have a physical guide. This way, you have a document you can refer to from time to time in case you lose track of your goals.
2. Gather information on your financial information.
In gathering financial information, be honest and realistic. Identify how much you are earning, and how much of it you spend — whether for daily needs (such as food and transportation) or for occasionally spending (such as school tuition or utility bills).
Your financial information should indicate the following details:
- Savings: What are you saving for, and how much of your earnings go to savings?
- Debts Standing: How much do you owe, and how much interest do those debts incur?
- Liquidity: Do you own assets that can be converted into cash anytime if needed?
3. Determine next steps.
Now that you know your financial information, identify what your actions should be. Your financial information will help you decide what actions you need to take. For example, having more take-home money means you may buy more investments. Having limited income means you may need to look for more sources of income such as businesses or employment.
It would help to identify all your money inflow and allocate where each percentage will go. Your allocation should not always be towards money outflow (like debt payments, expenditures, etc.). Make sure that you also think of increasing your emergency fund and retirement savings. Again, do not just do all these mentally — write them down.
What Should I Do After Creating a Financial Plan?
Once you already have a plan, here are things you need to do to ensure that your plans would become effective:
1. Make sure to put your plans into action.
As with any form of plans or preparations, it is necessary that you do something to realize them. You already have the right financial blueprint, so make sure to make good use of it. You have gathered and assessed the necessary financial information, so why not utilize this for your financial advantage?
Have the discipline to stick to your plan. If it involves more savings, help yourself by avoiding places or activities where you will likely spend. Your financial plan will not be effective if you keep making exceptions, and those small exceptions can add up to a lot of money over time.
2. Evaluate your plan.
Track or monitor the progress of your financial actions. Evaluate whether you are able to achieve everything that you have planned. If not, then you may need to adjust the plan.
This is the reason you need to write down all your plans — having a physical reminder will help you review your plan and evaluate better your financial actions.
If you are still asking “what is financial planning?”, simply put, it is a simple and important process of preparing one’s self towards financial security. Given that all things now come with a price, a financial plan will help you properly manage both your income and expenditures and, eventually, attain financial security.
How do you work on your personal financial planning? Share with us your own tips and suggestions in the comments section below.