Even with the popularity of financial advisers or financial planners on Twitter, most people still don’t really understand the basic steps of financial planning. This might result in fraud or loss of money because only you makes the final decisions on investing. So it’s important to learn a few things about this fundamental life skill.
What is financial planning?
In simple words, financial planning is simply the process of spending your money to meet your personal goals. The first stage is always to answer a series of questions about yourself. What would you expect to achieve in the next 1, 5, 7 or 20 years? What is the most important thing in your life? What makes you feel happy? What are your life statements?
In most cases, these questions need to make you consider your priorities, goals, and life. Without a good understanding of those things, it is impossible to make a good financial plan. Don’t worry about the financial aspects as these are just secondary. Once you have defined your goals well, it’s time to plan the cents and dollars.
Keep in mind that financial planning isn’t synonymous with investing, stock picking or asset management. Although investing plays an essential role in this process, it is just a small part of the whole plan.
What’s included in the financial planning process?
- Cash flow management: How much are you earning, saving, and spending? Do you prepare an adequate fund for emergency situations? Where would you hold an emergency fund to get the highest return?
- Debt management: Do you have any debt? If so, what is the interest rate? How much money should you pay monthly? Should you prioritise debt repayments over investing and saving?
- Real estate: Are you renting or owning a home, apartment or something else? Are you planning to refinance the mortgage? Is it a good idea to use a reverse mortgage after retirement?
- Investing: What are the investment options available to you? How many fees should you pay for a financial advisor? Do you utilise retirement plans available? Are your investments risky?
Why does financial planning matter?
With a good financial plan, you can improve many parts of your life…
- Financially smart: Understand your cash flow and how to allocate it could help you find out possible issues in the future. Thus, it is much easier to manage your money wisely and take advantage of available resources.
- More income: Those people who know how to perform a process of financial planning can have a high level of wealth compared to other people. Of course, you will not get rich and affluent overnight, but having a sound financial plan could help you spend, save, and invest much better.
- More confidence: In life, you will feel extremely confident when you are well prepared for something that is going to happen. And this is totally correct in financial life. Creating a detailed plan will help you control the cash flow better.