The act of financial planning consists of the long-term planning of your finances, which includes all the money you receive (whether you earn it, inherit it, win it, or otherwise), and how you fund your life goals from now until the end of your life – including planning for your family’s future via estate planning.
Financial planning is critical in determining short and long-term financial goals and how you can meet them. With the right plan, you can wisely manage your finances and monitor your plans while adjusting them accordingly to achieve your set goals.
Steps to Financial Planning
When you want to get serious about your finances, it’s time to engage in financial planning. Financial planning allows us to realize our goals and objectives by learning, organizing, and planning based on the reality of the current situation. You have to understand what is genuinely achievable and know the steps to make it happen to be successful with financial planning.
For most people, successful financial planning includes:
- Setting goals and objectives
- Determining your current situation
- Figuring your assets and liabilities
- Choosing your budget method
- Implementing and monitoring your plan
You do have to know where you are, where you want to go, and the steps that it takes to achieve that result, to be successful with any type of financial planning. But the good news is, anyone can get benefits from financial planning. Let’s look more closely at each of the steps involved with solid personal financial planning.
Step 1: Set Goals and Objectives
The personal financial goals and objectives you set for yourself should include both long- and short-term savings and expenditures. The goals you set should cover the goals you hope to achieve both today and throughout your life.
You’ll set goals for your entire life, including education, housing, and retirement. You’ll want to set goals that involve both short-term and long-term planning. For example, paying down debt, saving for a down payment for a house, saving for emergencies, saving for a vacation, affording health care, improving your career options, and of course, retirement planning.
Set goals for this year and set goals for the future for anything you want to do so that it makes it concrete. If you don’t set a goal for it and then set up a way to reach the goal, it’s unlikely to happen.
Let’s look at some financial goals that you may not have thought about that you may want to actively plan for, to give you some ideas about what financial goals you may need to think about.
- Develop a Realistic Daily Budget – The best way to get a handle on your situation is to have a realistic budget set up that involves paying your bills and meeting your daily needs, and keeping you to your future goals. If the budget is too tight, you won’t stick to it, so it needs to be as realistic as possible.
- Create a Six-Month Emergency Fund – One goal essential to all the other goals is having a backup emergency fund that you can get to right away when needed. This fund should include six months of needed funds to cover the basics. You’ll need to know what that amount is to be successful.
- Get Out of Consumer Debt – The biggest roadblock to success in financial planning is having consumer debt. Consumer debt involves unsecured credit card debt, payday loans, and the like. This type of debt can be useful at times but most of the time, it’s a big mistake that you should try to pay off as fast as possible.
- Plan for Retirement – It may seem far off, but this time of your life is closer than you think. Thus, it’s vital that you fully understand how money works, including compounding interest and so forth. If you start planning now, you can even set up a number that you need to retire early.
- College Education for Your Kids or Yourself – College is a considerable expense, and it is not always going to be covered by scholarships, even if your child is super-smart. You cannot rely on that. Every state has plans you can start investing in today to use for your child’s education in the future. If you want to go to school yourself, you’ll need to plan for that as loans are also a dangerous proposition and may not help you get ahead.
- Tax Planning to Avoid Overpaying – While most people don’t need that much tax planning, it can help to talk to someone who knows how to help you avoid overpaying and best use your money.
- Develop More Income Streams – They say that rich people tend to have more than seven income streams. You should also plan to have more than one income stream if you want to meet your financial goals. Work, investments, and cash flow from side hustles can go a long way to ensuring you can achieve your goals.
- Buy the Right Insurance – Everyone needs to buy insurance, but you want to make sure you never buy more insurance than you need. Most people need insurance on everything they own plus health and life insurance. A good agent can recommend what you need.
- Purchase a home – If you would like to stop renting and buy a home, setting a goal to save a 20 percent down payment is the first thing you should do. While you can buy homes without a down payment, most people will get better loan terms with a good one.
- Go on a Vacation – Even things like going on a vacation, whether yearly or less often, need some form of financial planning. If you plan for it, you don’t have to use credit, as this is is not a good way to fund your vacation.
- Plan a Wedding, Graduation, or Other Big Event – These types of events traditionally end up on a credit card. This is not good planning. Instead, you know these events are coming, so why not start planning for them now?
- Death and Estate Planning – Whether you like it or not, everyone gets old and dies. You can make everything simpler for your family by planning these events in advance. Plan your funeral and how you want your estate distributed with an attorney in advance.
You can work on every single one of these goals simultaneously or based on some priority you have set for yourself. It is certainly easier to tackle these goals once you’ve paid off your consumer debt, but no fret as building in a plan towards becoming debt free can and should be a part of your financial planning. The hardest part of planning and especially financial planning is getting started.
Step #2: Determine Your Current Situation
For many people, actually writing down everything to figure out what their current situation is, is very emotionally demanding. After all, sometimes you’re in more debt than you think, or your savings is anemic, and you feel like you’re much further away from the ability to retire than you thought. Your current financial situation can only be discovered through an honest reflection of the real current financial situation you’re in.
- What Is Your Net Worth? – This is simply a calculation of what you own minus your debts. It’s not unusual for some people to have a negative net worth if they are early in the payment process for their home. Assets include investments, the equity in your home, stocks, and other valuables like vehicles and even jewelry.
- What Is Your Debt Level? – Your debt level is everything you owe money on. Having said that, it’s a good idea to separate secured debt from the unsecured debt you have. The unsecured debt should be paid off as fast as possible. Secured debt often comes with low-interest rates and can be considered an investment, but you do need to know what you owe in total too.
- What Retirement Planning Do You Have So Far? – You need to know what type of retirement planning you are already doing. If you have a wage job, you may be investing in a 401K or other retirement accounts through work. If you work for yourself, you will need to set up these accounts yourself.
- What Does Your Credit Report Say? – At least yearly, pull your credit report and look at it from all three credit reporting agencies. You’ll get a real picture of what you owe and what you own by looking at this, and you also protect against mistakes or identity theft. You can use CreditKarma.com and monitor your credit all the time for free, but do ignore the ads regarding credit cards.
- What Types of Savings Do You Have? – Make a list of everything you save and where. Whether it’s short term, long term, cash, or other investments, do some future math to find out where you’ll be 5, 10, 15, and 20 years down the road if you stay on the same track.
- What Education Planning Have You Done? – If you have children, you probably need to be investing in and planning for their future education. Ideally, you’ll want to start at birth but if you’ve not started yet, look into your state’s 529 plans.
- What Types of Insurance Do You Have? – Almost everyone needs insurance at some point. Some of the types you need are life, health, house, renters, automobile, and (depending on your situation) liability insurance.
- What Investments Do You Have Now? – Separate your investments from your other savings to list what you have now. Calculate how your investments will be doing in the future if things stay the same.
- What Income Opportunities Exist? – One way to improve your situation is to create more streams of income. Can you pinpoint any opportunities to increase your income through smart investments or a side gig?
You’ll want to examine each aspect of your financial life to find the ways you’re on the right track, as well as the ways you’re not on the right track. The only way to do that is to be very realistic and write down every penny you have coming in and every penny you have going out, and to honestly acknowledge each situation where you have a shortfall so you can develop a plan for success.