Everyone chooses to handle their money differently. Some people are staunch savers or investors, while others are more than happy to drop a few extra dollars here or there for an expensive latte. Some folks only earn money for themselves, while others support families.
Solving everyone’s unique financial challenges with cookie-cutter financial planning services is impossible. Since people lead different lives and use money differently, the best thing to do is create a unique financial plan catered to one individual’s life.
Table of Contents
What is a Financial Plan?
A financial plan is a personalized document that incorporates your current income, expenses, liquid net worth, and financial goals for the near and long term. It features a roadmap you can follow and modify throughout your life so you can enjoy your life and stress less about money.
What is Financial Planning?
Financial planning is the iterative process of creating a financial plan and then actively monitoring and updating it as circumstances in your life change, whether related to your career and income, family and health, or lifestyle choices and your retirement plans.
Comprehensive financial planning will cover a diverse range of topics impacting your financial life, including:
- Your career, salary, employer benefits, and compensation planning
- Getting out of debt and paying off student loans
- Building savings
- Crafting an investment strategy
- Tax and estate planning
Some individuals and couples may independently create and maintain a financial plan, often using online resources like budgeting tools, spreadsheets, and robo-advisors. But many people prefer the help of a financial advisor with expert knowledge and experience in financial planning.
A Certified Financial Planner (CFP) is a good choice for people interested in a financial advisor with demonstrated experience and education in offering financial planning services to their clients. Many CFP professionals also provide their clients with wealth management services and financial planning.
Financial Planning Fundamentals
On the surface, financial planning appears straightforward. Taking a snapshot of an individual or couple’s financial picture today and understanding their goals for the future provides many of the necessary inputs to create a tailored financial plan.
The devil is in details. Think of financial planning as constructing a timeline incorporating tactics and strategies for multiple facets of your life. The resulting financial plan demonstrates the steps you should take today and in the future. It’s a means of understanding and managing your money and time.
Let’s review several essential features to include in a comprehensive financial plan. If you work with a financial planner, you can expect your plan to cover these financial planning areas, among others.
One of the most critical components of financial planning is a budget. Individuals and couples can ensure they live within their means by preparing and following a budget. A financial planner can provide oversight and accountability to ensure you are spending the right amount given your income and that you aren’t going into debt throughout your financial life.
Based on a January 2022 survey conducted to determine consumers’ financial health, 56% of Americans would be unable to pay an unexpected $1,000 bill from their savings, instead opting to charge a credit card or find other sources to cover the payment.
A good financial plan should include an emergency fund to cover 3 to 6 months of expenses. For example, if you lose your job without severance and expect you can return to work within six months, your emergency fund combined with your unemployment income should help you bridge the gap between jobs.
Debt Payoff Plan
Carrying a large balance on your credit cards costs you more than the money you pay in interest. It hurts your credit score and makes it more complicated to buy a home or car, start a new business, rent an apartment, or get a job. And student loan debt is something that almost every college graduate in the U.S. has to deal with, generally more than $30,000 on average.
A financial plan will determine which debt you should pay off first and how quickly to repay it. Suppose the interest rate is fixed and relatively low. In that case, a financial planner may suggest not paying off certain debts more quickly, especially if this frees up your dollars for savings or investments, which may offer higher returns.
A financial plan should provide the foundation for establishing your investment strategy. While it may not discuss the specific investments (you will hold your portfolio management particulars), financial planning should provide a vision of how much you should be investing. It should include the types of investments recommended to build an appropriate asset allocation.
A priority for many families includes saving for higher education and identifying financial aid and scholarships that can minimize their children’s student loan burden after graduation. A financial plan should provide a blueprint for using 529 college savings plans and other tax-deferred savings accounts to optimize a family’s education funding strategy.
A financial plan should include a discussion of insurance policies important for every individual and couple to consider. Insurance plays a vital role in financial planning, from policies designed to protect your assets like your home or car to policies that offer a guaranteed income stream in retirement or upon the death of a family member.
One of the primary benefits of financial planning is knowing when you can afford to retire comfortably. Your financial plan should provide a range of likely ages when you may be able to quit your job and live off your savings and sources of income like Social Security.
Estate Planning and Charitable Giving
While financial planning generally includes details about the handling of your estate, many people will have a standalone estate plan beyond their financial plan.
Estate planning involves establishing and maintaining a plan that outlines who will receive your assets after you pass away. Many important documents are required, some legal (e.g., a last will and testament) and some simply for the benefit of your loved ones. It’s a stressful time when a family member dies—having a solid plan prepared can ease burdens.
A component of estate planning may also include a discussion of your charitable giving aspirations. Financial planners are knowledgeable in using tools like a Charitable Remainder Trust that can reduce your tax liability.
An estate plan also helps when an individual is incapacitated, too. Moreover, estate planning includes your financial assets, other items, and last wishes. Due to the financial complexities and legal implications, many people choose to work with financial advisors and attorneys who offer estate planning services.
The Importance of Financial Planning
Lots of people think financial planning is just for the wealthy. It’s not. The outline below explains how everyone can benefit from a financial plan.
Coping with Tough Times is Easier with Financial Planning
Nobody can predict the future. Financial planning helps people fold risk into their planning strategies to ensure a better chance of being prepared if catastrophes occur.
Even smaller, more private family struggles– like the death of an extended family member– can throw unprepared households into financial disarray. Everyone encounters difficult times eventually– and people should plan for them.
Families Benefit from Financial Planning
Effective financial planning helps individuals and couples secure their family’s future. Whether they already have children or are planning to have some soon, a financial plan can provide the people closest to them with peace of mind.
Financial planning, ideally, helps people generate higher income and savings. These can be lifesavers during emergencies or unforeseen events.
Financial planning can create a safety net for parents who have children to provide for.
Many families also use their savings to help get their children started on the right foot. Financial planning should allow parents to help their children attend college, purchase a home, or buy their first car.
Financial Planning Makes Navigating Deaths in the Family Easier
While nobody likes to talk about it, financial planning also helps people prepare for the inevitable. Upon death, the finances of the departed will require handling by a family member or an authorized professional.
Individuals and couples can help ease the impact of their passing on those they love most with a sound financial plan. Countless families struggle to pay their bills or fund funerals when a loved one passes away. Financial planning can help people avoid this situation and support their families long after they’re gone.
The Bottom Line: Financial Planning is Important
Financial planning offers individuals and couples the confidence they need to enjoy life more with less money stress.
Lots of people choose to pursue financial planning on their own. For some, this is a sound and economical alternative to partnering with financial planning experts but requires considerable discipline and time to build and maintain throughout a lifetime.
Many people prefer to work with a financial professional, often choosing to hire a Certified Financial Planner. By working with a financial planner with proper credentials and experience, individuals and couples benefit from an accountability partner with their best interests.
This article originally appeared on Wealth of Geeks.
Greg is a Chartered Financial Analyst (CFA) with 22+ years experience in Financial Services. He has held numerous FINRA Securities licenses (series 7, 63, 65, and 66), and is an expert on Investment Products and Financial Planning. Greg has 22+ years experience as a real estate investor and degrees in Psychology and Philosophy.
Greg has been quoted/interviewed in Yahoo Money, Yahoo Finance, USA Today, Authority Magazine, Realtor.com, Business Insider, and others.
Greg is an avid runner, and the father to identical twin girls and their awesome brother. His love of budgeting and his kids led him to join The Great Resignation in 2021.
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