With inflation on the rise and record levels of household debt, financial planning is more important than ever. Individuals, families, businesses, financial institutions, and universities around the country are all beginning to pay more and more attention to financial planning.
What is Financial Planning?
Financial planning is a way to cast a vision for your financial future. A financial plan lays out a comprehensive view of your current finances, financial goals, and future financial endeavors. The plan should include details about your income, expenses, savings, debt management, insurance, taxes, investments, retirement, and estate planning.
Components of Financial Planning
The following are the seven important components of financial planning.
1. Cash flow and debt management:
Properly managing your cash flow, budgeting, credit, and debt form the foundation of the financial planning process – and, therefore, your financial stability and independence.
2. Risk management and insurance planning:
You have to assess your risk when you drive a car, live in a home, or own a business. You should understand the different types of insurance, such as automobile, homeowner’s, life, health, disability, long-term care, and umbrella coverage. Above all having the appropriate coverage can be the difference between losing it all during a crisis and weathering the storm.
3. Tax planning:
You have to understand the laws associated with taxes and the implications for your take-home pay. You also need to understand and identify ways to lower your taxable income.
4. Investment planning:
For you and your family to truly build wealth, you have to understand the importance of building a portfolio. You can utilize stocks, bonds, real estate, cash, and other financial resources. You also need to make sure that you diversify your wealth across the investment areas, particularly so that you can minimize the risk during tough times.
5. Retirement savings and income planning:
We all have different ideas for our desired retirement lifestyles. Some may want to travel, play recreational sports, or spend time with family. Regardless of the activities you prefer, you need to assess how much you will need to achieve your retirement lifestyle. You also need to understand how 401(k)s, individual retirement arrangements (IRAs), Social Security, and Medicare will influence your planning and your financial resources.
6. Estate planning:
End-of-life decisions are tied to estate planning. For example, you will want to create a will to inform your loved ones of your last wishes and testament, along with the distribution of your assets. Also, you will want to designate the power of attorney to a specific individual so that he or she can address your financial and health decisions if you become incapacitated.
A New Component of Financial Planning
7. Psychology of financial planning:
Your financial goals should be aligned with your personal values. If you value saving, you are going to save; if you value spending, you are going to spend. When you can recognize your behaviors and attitudes toward money, you can put yourself in a position to make sound decisions about your financial future.
Three Benefits of a Financial Plan
A financial plan offers you three primary benefits. First, a written plan can increase confidence about your financial situation – for you and for your loved ones. Second, a plan will motivate you and your family to save for your mutual financial goals. Third, a plan can lead to better financial habits.
We all need to be aware of our financial situations. The more you are in tune with your financial values and goals, the better your decision-making will be for your families and businesses. Creating your own financial plan – or working with a professional to address the seven components – will help protect you and your loved ones and achieve your definition of financial success.