PLANNING YOUR PERSONAL FINANCESWoodridgeandscott
Financial planning is not a one-time process where you make your spending plan and then sit back. It is a step by step process that acts as a guide and helps you reach all your set monetary objectives. It helps assess all your income and expenditure, so you are always aware of where you stand financially.
It includes everything concerning your savings, investments, fund flow, debt, insurance and any other components of your economic life.
No one can plan for your finances in a way that you can do. This is why every person needs to have a solid financial plan that can help you save money and fulfil your set short and long term financial objectives.
Financial Planning Process
To help you create a sound financial plan according to your distinct monetary needs and requirements, here are things that you should consider1
1. Define your short- and long-term goals
It starts with establishing short-term, medium, or long-term goals.
Do you want to be a millionaire before turning 40?
Do you want to keep a buffer for harder times in life?
Do you want to pre-plan for all future expenses like marriage, child’s education, and
Get a good understanding of your short and long term financial goals after separating your needs from your wants. These goals may change over time, it’s important to establish some preliminary goals to help guide your investment strategy.
Ask yourself : What do you want your financial future to look like?
2. Assess your Current Financial Situation
Once your goals in place, assess your ability to reach them based on your current cash flow. Evaluate your current financial condition to understand your expense capacity, investment amount, daily expenses, and obligations.
The key areas to reflect are:
Household budgeting. This is an important area as after calculating the monthly costs spent at home, you be able to figure out how much you have left to save or invest.
Family commitments and Living Expenses Are you single or married? Do you have children? What are their living and lifestyle expenses?
Tax standing and strategies How do you manage taxes?
How much savings or debts you have right now?
Other Financial obligations. These may involve some miscellaneous costs you might be planning ahead for future such as:
A wedding or property purchase
Emergency funds to cover for household catastrophes
Family Funds reserve in case something happens with your job or you
Is your retirement just around the corner?
This step serves as a foundation for developing your plan and gives you a good reference point to achieve your short as well as long term financial goals.
3. Determine Financial Goals
Highlighting the financial goals serves as an important aspect of financial planning. When you have identified your goals; you’re most likely to achieve them. Subject to what phase in life you have reached, these goals could be:
Get married and initiate a family
Purchase a car
Ensure your children get a good education
Get retirement with enough income on hand to enjoy life ahead The sole purpose of this step is to differentiate your needs from your wants. Apart from these,
the goals or objectives may range from spending your entire income into developing a long lasting investment program for future financial security. However, you must select which goals you need to pursue
4. Identify Alternatives for Investment
A good financial plan is flexible and can be adapted as new challenges and scenarios arise. From unforeseen expenses to new financial goals such as increased travel during retirement” your financial plan should offer you some insight into how those changes would affect your outlook and your current savings plan. Creating alternatives is vital for using sound judgment. Thinking about the entirety of the potential alternatives will help you settle on more fulfilling and feasible choices while creating a financial plan.
5. Evaluate Options
Evaluate all the investment options according to your risk-taking capacity and earnings to get higher returns for a long time. Each financial choice cancels out other alternatives. For instance, an option to invest your entire funds into stock may mean you cannot invest in other saving plans. Opportunity cost is what you surrender here by settling on a decision. The Decision-making process will be a continuous segment of your personal as well as economic situation. Hence, you will have to consider the lost opportunities that will occur due to your selected decision.
While evaluating the options you might end up having uncertain ideas. For instance, choosing your career over studies involves risk. Risk is a part of every financial decision. However, defining and assessing your risk can be a challenging task. Hence, an ideal approach to consider risk is to accumulate data that project your earnings and risk-taking capacity to create a secured financial plan well-suited to fulfil all your monetary obligations. Once you get this, you need to make an action plan that can pave the way to accomplish your goals. As you succeed in your immediate or momentary pursuits, the goals next in line will come into the picture.
7. Develop a comprehensive financial plan.
Once you’re satisfied with your goals and your ability to meet them through saving and investing, it’s time to develop a solid plan for how you will make progress from month to month. This includes mapping out timelines for when you will reach certain goals, such as saving for a down payment. You will also need to use calculators to make sure your plan will be sufficient to reach important benchmarks and long-term goals, such as adequately funding your retirement based on your target retirement age.
8. Implement and monitor that plan.
After a financial plan is set, it’s time to follow through with that plan and make the changes necessary to reach those goals. Track your progress on a monthly and annual basis to avoid falling behind, and track investment earnings and interest dividends to make sure you’re on pace to meet or beat your projected timeline.
9. Adjust goals or other financial plans as your circumstances change.
Financial planning is a robust process that doesn’t end when you create a specific plan of action. You need to assess your financial choices periodically. Also, your individual, social, and economic-financial components may require more frequent assessment. When life contingencies influence your financial obligations, this financial plan will work wonders to adjust to those changes. Periodically evaluating this dynamic process will help you make necessary changes to align your financial objectives and activities with your existing life situation.
If your goals change, or new challenges crop up that make it difficult to meet the demands of your existing financial plan, a new approach may be required. Financial planning can always be affected by a loss of income, a big promotion, new additions to your family, failed investments, medical emergencies or disabilities, or even your own personal reassessment of what matters most to you.
As your circumstances and priorities change, you will need to adapt your financial plan accordingly and, in some cases, these changes will be motivated by increased saving and investing power that lets you accelerate your progress toward savings goals.
Benefits of Financial Planning
There is a myth that financial planning is for people with surplus money. On the contrary, Financial plans are designed for people from all walks of life, irrespective of their earning level. Mentioned here are some significant benefits of financial planning.
It can help increase competence in acquiring, appropriating, and securing your financial assets throughout your lifetime.
Gain control of your finances by steering clear of your debts and reliance on others for monetary security.
A feeling of self-containment is gained by financial planning, predicting expenses, and fulfilling your monetary objectives.
To sum up, we can conclude that a solid financial plan can always help you create a better future and gain higher earnings on all your investments.
a sense of freedom as far as financial anxiety concerns investing properly to attain life goals easily through early anticipation of expenses and investment. It is an attempt to be future-ready and achieve personal financial plans simultaneously.
an increased sense of awareness and control of financial goals. In addition, since individuals are completely in control of their expenses, it saves them from facing
unwarranted debt or reliance on others for financial stability or even bankruptcy in certain cases.
A sense of security for the family members leads to enhanced personal connections and less trouble in the future. a comprehensive roadmap for future obligations, thereby obtaining and protecting financial resources.
a better financial understanding of the current economic condition and what it may make to maintain the same standard of living in the future. Appropriately investing money in the current financial options can save for the future depending upon the objectives and risk appetite appetite refers to the amount, rate, or percentage of risk that an individual or organization (as determined by the Board of Directors or management) is willing to accept in exchange for its plan, objectives, and innovation.
A healthy financial plan suits the requirements of a particular individual, considering the monetary standing at that specific time. a financial plan for a person in his 20s would be completely different from the one in his 40s.
As has been rightly saying, “Life is inherently risky. There is only one big risk you should avoid at all costs, and that is the risk of doing nothing”, so do not sit still by doing nothing. Instead, secure the financial future by making a financial plan if one has not already done so