No matter what your goals are in life, if you want to succeed in achieving them, then proper planning is a must. After all, like Benjamin Franklin, once said, “If You Fail to Plan, You Are Planning to Fail.”
Even though there’s actually little evidence that Franklin coined the adage, over the years there have been three popular versions using “plan” and “prepare;”
Failing to plan is planning to fail.
The person who fails to plan plans to fail.
By failing to prepare you are preparing to fail.
What Is Financial Planning?
In order to accomplish one’s life goals, one must create a financial plan. How? Because a financial plan acts as a guide as you navigate your way through life.The Importance of Financial Planning
Still not convinced about the importance of a financial plan? Here are seven practical benefits that should change your mind.Gets you closer to achieving your life’s goals. Owning a house, purchasing a family car, or providing for your children’s education and marriage are some common examples. Cash flow and wealth growth. Income growth leads to increased cash flows. Also, this helps you track your income source so that it can be grown further.
Enjoy a better standard of living. If you have a good financial plan, you won’t have to compromise your lifestyle. In fact, you can achieve your goals and live comfortably at the same time.
Asset creation. A financial plan can provide insights on asset creation and ensure that it won’t become a burden. As a result, you’ll have peace of mind.
Optimizes your savings and investments. You gain an in-depth understanding of your income and expenses through the creation of a financial plan. You can track and cut down your expenses proactively. Eventually, this will increase your savings. A good financial plan also takes into account your personal situation, risk appetite, and future goals so that you’ll pick the right investments.
Helps you tackle inflation. One of the main causes of the decline in purchasing power is inflation. For this reason, it is important to plan your finances for the future. In the coming years, as you age, you are better prepared to deal with the rising inflation thanks to acute financial planning.
The Key Components of a Financial Plan
While it may seem like an over-exaggeration, financial planning is one of the most important aspects of our lives. But, for a financial plan to be effective, it should contain the following ten components.1. Goal Identification
To achieve your goals and desires, you need to understand and identify them. When your goals are crystal clear and have meaning, your plan will be more effective More importantly, you’ll be more motivated to follow through with your financial plan.Also, you might find it helpful to write down your goals. “Vividly describing your goals in written form is strongly associated with goal success,” Mark Murphy wrote in Forbes. “And people who very vividly describe or picture their goals are anywhere from 1.2–1.4 times more likely to successfully accomplish their goals than people who don’t.”
It’s recommended that you divide your goals into the following three categories;
Short-term. These are goals that you hope to achieve in the next five years. For example, paying off previous debts or purchasing a new vehicle. Medium-term. Establishing yourself as an entrepreneur or purchasing property are just two examples of medium-term goals. Often, these objectives take between 5-10 years to become a reality.
Long-term goals. Goals considered long-term are those with a duration of more than 10 years. Some basic long-term goals are retirement and education for your children.
2. Net Worth Statement
“Every plan needs a baseline, so next you should determine your net worth,” states the folks over at Charles Schwab. List all your assets (bank accounts, investment properties, valuable personal properties) and debt (credit cards, mortgages, student loans). Then, deduct your assets from your liabilities to determine your net worth.3. Become Aware of Income and Expenses, Aka Your Budget
Personally, I’m not a fan of budgets that are too rigid. Despite this, I’m still aware of where my money is going and take steps to prevent living above my means.What’s more, when it comes to budgeting, there’s no right or wrong way. It’s all about choosing the method that works best for you, such as the following six types of budgets;
Line-item budget. Perhaps the most well-known type where you list each of your expenses by category in Excel or some other spreadsheet.
The 50/30/20 budget. Here you break down your income into the following categories; 50 percent (necessities), 30 percent (wants), and 20 percent (savings and debt repayment).
The envelope system. With this system, you divide your income into different spending categories, like bills, groceries, and gas. Then you would only pay the bills or buy the things within that category with the money you have in that envelope.
Pay yourself first. A reverse budgeting strategy is a way of setting aside a portion of your income for goals, such as retirement, before you spend it on food, utilities, or discretionary items. A predetermined amount is set aside, and it is automatically transferred into the appropriate savings account(s).
The zero-based budget. With zero-based budgeting, you subtract your expenses from your income to arrive at zero. You must ensure that your income matches each month’s expenses when you use a zero-based budget. This way, every dollar that comes in has a purpose.
Hybrid budget. You can create a more personalized budget by combing the features of the budgets listed above.
4. Acceptable Risk
Often called “risk tolerance,” this describes how you balance the risk of loss with the potential for bigger rewards. A professional might ask you questions such as;“What would you do if your portfolio lost 20 percent of its value?”
“Sell everything?”
“Hang on?”
“Invest more?”
5. Make Sure Emergencies Don’t Become Disasters
Based on Bankrate’s July 2021 Emergency Savings Survey, 25 percent of Americans (or 1 in 4) report having no emergency fund at all, up from 21 percent in 2020. Why is this concerning? Let’s say that you need $300 to repair your car or appliance. You’ll have to put this expense on your credit card, which can prevent you from being free of debt.With that in mind, even a small emergency fund of $500 can make a world of difference. After you’ve accomplished that goal, bump this up to $1,000. Following that focus on one month’s living expenses and so forth.
6. Purchase the Right Type of Insurance
“Insurance is an essential part of any sound financial plan,” notes Brian Collins for Hippo. “Being prepared for the unexpected will ensure that you can still reach your goals after facing a financial crisis.” Additionally, insurance can keep your emergency fund from being depleted.As a result of an accident, becoming ill or disabled, or passing away, insurance can protect your loved ones financially. If you do not have coverage, certain situations can be expensive, so make sure you purchase the policy that’s right for you. In fact, experts suggest you that insure yourself before investing serious money.
But, what type of policy do you need? Well, that depends on your particular situation. For example, if you own an automobile or home, then auto and homeowner’s insurance are a must.
7. Tackle High-Interest Debt
An important step in all financial plans is to pay off high-interest debt. Examples include credit card balances, payday loans, title loans, and rent-to-own payments. Because the interest rates on these are so high you wind up paying back twice as much as what you borrowed!8. Invest to Build Your Savings
Despite our misconceptions, you don’t have to be Elon Musk-rich to invest. In reality, anyone can invest their money in order to bolster their savings.A 401(k) plan or an account with a brokerage firm can make investing as frictionless as possible. Even better is that most don’t require a minimum account balance to open. Another easy way to embark on your investing journey is to utilize robo-advisors.
Furthermore, investing for retirement, a house, or a college often requires a variety of financial planning tools, like
Employer-sponsored retirement plans. Contribute gradually toward the IRS limit of $19,500 if you have a 401(k), 403(b), or similar plan. The limit goes up to $26,000 if you’re over 50.
Traditional or Roth IRA. Investing in tax-advantaged investment accounts can further increase retirement savings by as much as $6,000 a year (or $7,000 for those over 50).
9. Plan for Retirement (and Taxes)
To have the lifestyle you want during your golden years, you have to plan accordingly. Taking inflation into consideration, this involves calculating how much you’ll need to retire, and how you’ll plan to save and invest for the future.Taking steps toward retirement may seem like a lifetime away, but it’s never too early to begin. But, it’s necessary if you want to have a comfortable and stress-free retirement. Your future self will thank you.
In addition to retirement, you also need to factor in taxes. While taxes may be irritating, they are just as inevitable as Thanos. As such, you’ll want to include taxes in your long-term income projection. After all, failing to do so can negatively impact your cash flow.
