What is Financial Planning?
Financial planning is the process of planning for your short-term or long-term financial goals, like saving for retirement. For example, if you would like to buy a house, you need to plan for it. You need to know how much the house will cost you, how much money you need to save for a down payment, or how long it will take you. That’s financial planning.
Financial planning starts with thinking about your current finances. That includes your debt, savings, investments, cash flow, etc. Then you need to look at your financial goals, how long it will take you to achieve them, and the steps it will take to get there. Financial planning is important because it serves as a roadmap that helps you achieve your goals.
Financial planning can be done on your own. However, in certain situations, a financial adviser may be a good idea.
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Understanding Financial Planning
Financial planning considers your current financial situation, your short-term and long-term goals, and your strategies on how to achieve those goals. Financial planning begins with a comprehensive evaluation of your financial state. This includes your assets and liabilities such as savings, debts, house, car, net worth, investments, etc. Once, you have looked at your current financial situation, then you must establish your short or long term goals.
For example, one of your goals might be planning for retirement. In that case, you need to know the types of retirement accounts that can help grow your money, your time horizon, how much to contribute each month. Therefore, a retirement plan, which is a form of financial planning, is important. Other types of financial planning, besides retirement planning and buying a houseincludes estate planning, tax planning, investment planning, education funding planningetc.
Almost anyone can benefit from some level of financial planning. The key is to start now. Below are some of the steps to financial planning.
Financial Planning in 5 Steps:
Financial planning requires several steps. The first step is to decide what your short term or/and long term goals are. The second step is to pay off any high interest debts you have, with the exception of a mortgage. Another step is to save your money. The fourth step is to work with a financial advisor. Once you have considered these steps, you or your financial advisor should be able to put together a financial plan for you.
1. Start with your financial goals
Financial planning starts with setting your financial goals. In other words, goals provide the foundation for a financial plan. It’s okay if you don’t know all the details yet. You just need to think of the big picture. Some of your goals might include:
- Buying your first home or a second home
- Planning for your estate
- Saving for retirement
- Getting married
- Starting a business
- Saving for your children’s education
- Growing your family, etc
Having your goals thought out will help you create a financial plan, which will then help you implement those goals.
2. Pay Off Your High Interest Debts
Paying off high interest debts, such as credit card debts, is an important step in the financial planning process. One reason is because the longer you ignore it, the bigger your debt becomes. Another reason to pay off your credit card debt is because it will not only save you thousands in interest payments, it will make you a more attractive applicant to lenders when it’s time to apply for new credit, a personal loan, or a mortgage loan.
There are a few things you can do to get rid of your debt. The first is to know how much debt you have. And the best place to know that is through your credit report. So get your free credit report from Credit Karma and Credit Sesame. Another thing to do is to decide how much extra cash you can put towards those credit cards. You will be surprised how fast you can pay off your debt in a year by making extra payments. Another step is to consolidate your debt by getting a personal loan.
3. Save Your Money
Once you have taken care of your high interest debts, like credit card debts, your next step in the financial planning process is to save your money. Lots of it. The reason is because whatever big plans you have for the future, you’ll need to make sure you have enough money in the bank to fund it.
4. Work with a financial advisor
A crucial step in the financial planning process is to work with a financial advisor. While financial planning can be done on your own, sometimes help from a financial advisor can guide you in the right direction, especially if you’re dealing with a more complicated matter such as setting a will or estate planning.
A financial advisor is a professional who can provide you with financial advice in various subject matters. Those subjects include budgeting, investing, estate planning, retirement planning, risk management, taxation, etc. A financial adviser can help you take control of your money, get rid of your debt, save money, and build wealth. They can help you develop an investment plan, or help you plan for retirement, etc.
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Finding a financial advisor can be tedious. A simple Google search for financial advisors near me can turn up thousands of financial advisors offering their services. However, such large results can be overwhelming. And you may not be certain if those advisors are vetted.
However, finding the right financial advisor that fits your needs doesn’t have to be difficult. SmartAsset’s free tool matches you with fiduciary financial advisors in your area in 5 minutes. Each advisor has been vetted by SmartAsset and is loyally bound to act in your best interests. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
5. Start building an emergency fund
Another important step in the financial planning process is to have an emergency fund. The reality is that at some point in your life, you are going to run into some unexpected expenses. It can be a large medical bill or a major car repair. An emergency fund is there for those sudden surprises. It’s a good idea to have at last six months of expenses saved.
Implementing Your Financial Plan
A financial advisor can help you create a financial plan and implement your goals.
A financial plan is a piece of document that you or your advisor have created for you that breaks down your goals and the steps you have to take to achieve them. Your financial plan might include:
- In terms of retirement planning, how much you have to put toward your retirement accounts every month.
- How much to pay each month to pay off your credit card debt, student loan or mortgage.
- How much to budget for your next family vacation.
- The amount of money you need to have in your emergency fund.
As mentioned above, you yourself can do your own financial planning. However, in certain situations, a financial planner or professional might be your best choice. A financial advisor can help you prioritize your goals and offer you advice on how to achieve them.
In conclusion, everyone, regardless of age, should do their financial planning. It’s important because it gives you a roadmap of how you will achieve your financial goals. And the sooner you start working on those goals, the better off you will be. Also remember, you don’t have to do it alone. A financial advisor can certainly help along the way.
Work With the Right Financial Advisor
You can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc). Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.