Financial Planning: Key to Achieving Financial Freedom
Financial planning is one of the guarantors of stability and protection against possible risks both in personal life and business environments. Thanks to it, you will not make mistakes and will manage to catch good growth opportunities. All this sounds very good, but for some, drawing up a financing plan can be somewhat overwhelming. To handle such a complex task, you need to break it down into several smaller steps. Below you will find expert advice on planning and budgeting.
What Is Financial Planning?
The basics of financial planning involve sound management of expenses and income, including setting short-term and long-term financial goals and developing methods to achieve them. That is, it is a process that allows you to get a complete picture of your current state and, based on it, plan for the future. Thus you can use the assets you have more efficiently, form an emergency fund, and prepare for any obstacles.
What is a personal financial plan? The optimal strategy takes into account all aspects of your life, the interests of each family member, income sources, basic needs, and additional expenses. If you have a fairly simple situation, you can do all the planning by yourself, for example, using a financial budget planner. If there are any complicating factors, consider seeking help from planning professionals.
How to Make a Financial Plan?
Personal money management is what everyone should be able to do to keep themselves and their money under control. Making a plan might seem like a daunting task, so here is a list of steps in financial planning you should follow.
Set your financial goals
The first thing you need to do is to determine your goals and prioritize them. By and large, goals are the reasons why you started to build the plan in the first place. It could be getting out of debt, closing a student loan, building up retirement savings, saving for a better future, etc. Any goals must be measurable and realistic. You should clearly define how much and for how long you want to save up. Your plans can be both short-term (for several months) and long-term (covering several years). Even if you don’t have specific problems that need to be addressed as soon as possible, you can save money for a dream or a better life in the future. The main thing is to define it in terms of money and time.
Manage potential risks
Risk management should be highlighted among other critical components of a financial plan. Emergencies such as rapidly declining health, car repairs, or job loss are never planned. However, you can mentally and financially get ready for them by putting aside some of the money in an emergency fund. Though it is difficult to predict how much you might need, you still need to have a certain reserve. There is a conditional rule according to which the size of your fund should be about three to six monthly subsistence minimums. High-yield accounts are a good option for multiplying your savings, which can provide you with passive additional income.
Plan for taxes
Any guide on how to create a financial plan includes working with taxes. It means not only paying your income taxes on time but also understanding what credits and deductions you can qualify for. Most people don’t take advantage of these tax relief opportunities, but they can be a great help if you want to get out of debt faster or save some money. The tax authorities of different countries offer incentives for investments, health savings, pension plans, and so on. As your life situation changes, the list of credits and deductions might change as well, so you need to be aware of your options.
Debt is a serious obstacle to capital accumulation since, usually, any savings go to pay them off. Therefore, the popular tips for financial planning will not work effectively if you have unpaid liabilities. Paying off all debts at once is not easy, so they need to be prioritized in the same way as your goals. First of all, you need to deal with high-interest debt (sometimes, they are called “toxic” debts). These include credit card debt, loans of various kinds, rent payments, and so on. If you find it challenging to deal with all the obligations on your own, consider the option of a debt management plan and contact a debt relief agency.
Track your money
Keep track of where your money comes from and where it goes. It might seem like way too simple advice, but unfortunately, many people neglect it. You should have a clear and complete picture of your financial flows. Fortunately, you can now use the personal financial app for this task rather than manually write data in a notepad. Such services visualize information, making it more convenient for analysis and budgeting. With mobile apps, you can discover your weaknesses and cut back on unnecessary spending to reach your goals faster. You can create a budget (for example, according to the 50-30-20 model) and set limits in your tracker.
Invest to build your future goals
You do not need to understand the market situation and know how stocks work to have passive income or savings from investments. You can make any extra money work for you. Various government programs can be essential components of a financial plan, and their range directly depends on your country. For example, in the US, there are more than 500 college saving plans (for those who save money for their or their child’s education), retirement plans (for example, employer-sponsored 401(k)), and numerous variations of IRAs (also retirement accounts) with tax benefits. If you have some knowledge of securities or are interested in them, consider the option of long-term investment associated with minimal risk.
Benefits of a Financial Plan
If you still don’t get why financial planning is important, here’s a short list of reasons to work on a clear plan:
- you will be able to control your financial flows to the cent;
- it will become easier for you to set and achieve goals;
- you will develop healthy financial habits;
- potential difficulties will not take you by surprise;
- it will be easier for you to discover ways to accumulate wealth;
- you can be confident in your future, etc.
While planning for the future financially doesn’t sound like an exciting adventure to some, it is really something everyone should do. Create a budget and plan that fits your capabilities and goals and review them at least once a year to find areas for improvement.