When planning finances, people assume it primarily deals with money and time. While true to an extent, financial planning is essential to every person’s life, regardless of their status.
But what is financial planning, and how does it fit into people’s financial state?
What is Financial Planning?
Financial planning is the long-term method of managing your available finances to achieve certain things and living conditions in the future. This plan doesn’t just ration the funds you need for your goals. It also considers the possible financial obstacles you can face along the way.
The process of planning your finances has seven steps. Here’s what you need to know about each one.
- Set goals
Before you can start saving, you must first identify what you’re doing it for. Putting an end goal in your financial plan—whether it means purchasing a home, a car, or traveling the world—makes planning your finances more intentional.
- Track your money
Determining your current source of income and how you use it gives an idea of how much you can put into your savings. An example of this is the 50-30-20 rule.
According to this spending habit, you can funnel 50% of your monthly gross income towards necessities, like rent, utilities, and transport, and 30% goes into wants. Meanwhile, you can put the remaining 20% into your savings account.
- Address shortcomings and adjust accordingly
Having a set of goals and recognizing your income flow can help you recalibrate your financial plan to better align with your current financial situation. If, for instance, you can’t purchase a house in five years due to your current salary, adjusting it accordingly to a later date can help you achieve that goal.
- Plan for emergencies
While planning for your goals is essential, saving money in case of an emergency is equally crucial. Starting small can help you get by regarding repairs and other similar situations. Eventually, you can put more money into your emergency funds.
- Tackle high-interest debt
One of the first things you should try to eliminate as much as possible is paying for high-interest debts. These debts usually cover credit card bills, loans, and the like. Leaving them unattended can cause your future self to pay more instead of saving.
In addition to your primary source of income, investing in stocks or property can give you passive income, which you can combine with the money already in your financial plan.
- Protect your Financial well-being
You will earn more when you eventually climb higher in your professional rank. Putting in a proportionate amount to your savings can speed up the process of achieving your goals.
Lesser-Known Facts About Financial Planning
The traditional goal of financial planning is to ensure you’re well taken care of financially in the future. However, less-known facts about planning your finances debunk the notion that only the future matters. Here are some of them.
- Your present matters as well
Even if financial planning is to benefit your future self, the future is never certain. However, you may be sure with the present. While everyone strives to have different life goals, what you do today can affect how you live in the future. Learning to appreciate the process makes the result much more meaningful.
- No such thing as a lengthy financial plan document
A financial plan helps you be more mindful of how you spend your finances and to prepare financially for the future. Making a long financial plan may be challenging since it will confuse you.
A long document is different from a productive or informative plan. You can summarize a financial plan in one page, making it more digestible than a lengthy document with unnecessary charts and tables.
- Look for a flexible financial plan
A good financial plan is one that the individual can follow consistently. After the financial planner hands a personalized plan, only a small percentage of people follow and implement it.
While the advice given is part of the process, it does not encompass the actions or the dedication the person must have to achieve a successful financial life in the future. With action from the person, a financial plan is useful. As such, it’s best to have a financial plan that you can dedicate yourself to following.
- You benefit from your financial plan
Because every person is different, there is no such thing as one financial plan that fits everyone’s needs. Each plan is unique. In other words, you can personalize it to tailor-fit a person’s needs and preferences.
- Stay committed
Financial plans don’t happen overnight. They don’t create significant results in a span of a few years.
Being dedicated to reaching your targets is not something most people can do. Often, they start strong but slow down or stop altogether after years of few to no results. However, your commitment until the end enables you to achieve a stable financial life, and so will your family.
Financial Planning for All TimeAs you develop your financial plan, the future is a big part of the decision-making process. Despite that, it isn’t the only thing worth considering. Making the most out of what you do in the present equally impacts your financial plan for years to come.