What is Financial Planning?

Financial planning is the process that considers an individual’s (or family’s) current financial state, and then strategizes action steps to reach their future financial goals.

You may be wondering, what is financial planning? I mean after all, isn’t it as simple as making more and spending less? Not so much. Financial planning is the process that considers an individual’s (or family’s) current financial state, and then strategizes action steps to reach their future financial goals. In other words, it’s a plan that enables people smooth financial transitions through different life stages, peace when dealing with financial stress, and freedom to control their money instead of get controlled by it. This plan requires smart planning, due diligence, and patience to get the most out of your money. However, when executed correctly, creating a financial plan will give you direction and motivation to reach your financial goals. Here’s everything that goes into an extensive financial plan.

What Does Financial Planning Entail?

1) Financial goals Before you get into how to make your goals happen, you have to first start with what your financial goals are.These could include reaching a certain net worth by a certain age, buying a house or vacation home, sending your kids to private college, retiring by a certain age, and more. Your financial goals are the umbrella of your financial plan.

2) Income and spending The most basic step in creating a better financial reality is knowing the specific details of how much money is coming in and going out each month. When you know this, you can make quality decisions like investing in assets or paying off debts. And getting an understanding of where you’re spending money will highlight money that’s spent on unnecessary items, so you can cut back and save more.

3) Assets and debts Knowing what you bring to the table gives you a clear picture of your financial reality and how to improve it. Although it may be difficult to know the full extent of your debt, the only way to relieve the stress is to address it head on with a plan to reduce or eliminate it.

4) Lifestyle changes A successful financial plan addresses the short-, middle-, and long-term. So forecasting the lifestyle changes coming up provides insight on how to direct your income and cut back on expenses, if needed. These lifestyle changes could be a change in jobs, a baby on the way, going back to school, or a mini-retirement in Europe.

5) Insurance against risk Part of a solid financial plan is protecting against the financial strains of life. A loss of job, property loss, an injury or disability, and a loss in the family all need to be at least discussed and possibly accounted for to protect your future stability.

6) Retirement strategy In how many years do you plan to retire? How expensive is your lifestyle going to be? How much money will you need to live on when you’re retired? Answering all of these questions will first help you calculate how much money you need to accumulate to retire. And that answer will be useful for when you formulate a financial plan to support your retirement.

7) Estate planning The long-term perspective of a comprehensive financial plan involves estate planning. This means arranging your will, power of attorney, estate and assets, and other measures to make sure your wishes for your money are fulfilled after you’re gone.

8) Reviewing your plan and adjusting Unfortunately you can’t create a financial plan and then set it on autopilot. It’s in your best interest to review your progress and adjust your actions based on your situation each year. Maybe you get an inheritance or lose your job, then your plan needs to be adjusted.


Who Can Benefit From Financial Planning?

Financial plans don’t discriminate based on age, so essentially everyone can benefit from one. For example, millennials are the least likely to have a financial plan, but arguably they could benefit from one the most. A financial plan could help them handle something as early as paying for college, increasing their income after school, tackling debt, limiting their expenses, and growing their money through investments. Making smart financial moves in your twenties will prove to be extremely valuable to building a sizable net worth as you get married and have your own family. That brings up married couples, and they especially need a financial plan. When two people come together, they bring two incomes, double the assets, and multiple debts together. Finances will get messy without clear goals that you two agree on. And it’s always wise to plan in advance for having a baby and all that comes with it, like expanding your place and saving for college. Of course, married couples also need to plan for their retirement and lifestyle after they stop working. You may think once you’re retired, financial planning stops and you work with what you have. That’s not true, or very smart. Retirees also need a plan for their money. They need to make sure their money lasts through retirement, plan for their new lifestyle, and determine how they’re going to handle their assets and estate after they pass away. So when we exclude everyone we just mentioned, it’s clear that about everyone who is old enough to have a driver’s license can benefit from establishing a financial plan for their future. And all financial plans aren’t the same.

Get Help For Your Financial Plan

Setting up a financial plan is only a good step if it works. It won’t help much (and can actually be harmful) if you don’t know exactly what you’re doing. That’s why creating a rough financial plan around your best guess and having a professional financial planner create a specific strategy based on your values are two completely different things. So there are plenty of benefits from going to a financial planner with your finances. For example, the technical knowledge to know where to invest, how to reduce risk, decrease taxes, and plan for retirement, will be very profitable on its own. Through their education, years of experience, and daily attention on this subject, a professional will most likely know more than you could on your own. And besides the technical knowledge, a financial planner can also be an accountability partner who keeps you in check if you momentarily stop following your financial plan. Everyone is somewhat emotional about their money, so having a logical voice that isn’t biased can protect you from bad buying or selling decisions. To recap, financial planning evaluates your current financial state to create a strategy for your future financial goals. Basically everyone can benefit from one, as long as the plan is strategic and customized to your individual desires. And a financial planner can be your best shot to reach financial freedom quicker. If you want to take the first step to setting up your financial plan, consider meeting with a local financial planner. You can find one near you through our financial service directory.