If you’ve been wondering how to handle your finances, especially to cover you for the future, financial planning is the best way to go about it. There are components of financial planning that will help you understand how to effectively execute whatever financial plan you decide to go with. This is especially for the young folks who want to protect their future and that of their kids. If you have a well-paying job but your bank account is not reflecting this position or you have a minor expense in the coming years and you want to know how to go about it most prudently, then you need a financial plan.
What Is Financial Planning?
Financial planning is a method of taking control of your finances. It usually serves as a guide to your spending as you achieve your goals at every stage of your life. Financial planning is basically a way of handling your income, expenses, and investment so you can achieve your life and financial goals.
Why Is Financial Planning Important?
Financial planning is a way of budgeting your finances so you can cater to both current and future needs. It is an important aspect of your finances that you should not ignore. Here are the reasons why financial planning is important:
1. Contingency Purpose
No one knows the future and there are a lot of things that can happen that you neither plan for or budget for. It could be anything ranging from health, sudden job loss, child support, or travelling needs. Having a financial plan will help you set aside a contingency fund for such eventuality. Financial advisors advise that you have a contingency plan worth at least 6 months of your salary. This fund will be invested in a liquid investment so as to give you access during an emergency. It is simply a case of doing your best to prepare for the worst.
2. Comfortable Retirement
Retirement is an inevitable phase that everyone will live to experience. However, when it’s time for retirement, you will not be able to work and earn money to sustain yourself. That is why it is important to start a financial plan that will ensure you live out your retirement days with enough funds. It could be the time you travel the world and explore different cultures since you will be having time on your hands. Also, having a retirement fund will help you cater for possible medical needs when you are old and vulnerable.
3. Effective Money Management
Once you start a family, it may be difficult to keep track of your obligations and resulting expenses. The wife wants a dinner gown, the kids want a car, or the whole family wants to move into a bigger apartment. The best way to get ahead is to have a financial plan that will monitor your spending and guide you on the best ways to satisfy the needs of your family.
4. Handle Inflation
Times change so does the economy. The prices of goods today might not be the price in the nearest future. Having savings is good, but when your savings does not grow in value, it does not effectively tackle inflation. A good financial plan will include growing your savings to last you long enough in retirement and to also handle inflation in the future.
5. Peace Of Mind
A good financial plan will relieve you of the burden of worrying about your current and your future finances. You can adequately cover your expenses, save some funds and invest your saving to earn more. With all these settled, there is certainly a reassurance and peace of mind this gives you, having settled your finances.
Types Of Financial Planning
1. Cash Flow Planning
This helps you monitor and plan your inflow and outflow of cash. It allows you to manage your expenses and how you fulfil your current and future financial obligations. This will enable you to set aside savings and invest them for future needs.
2. Investment Planning
This helps you identify the types of investment that will ensure your savings don’t just lay dormant. There are different investment vehicles that give varying returns. Investment planning will help you identify the best short-term and long-term investments for effective financial planning.
3. Retirement Planning
It is nota healthy thing to be worrying about your finances during retirement. Your financial planning should include a retirement plan that will cater for when you are no longer able to actively earn an income. There are long-term investments that will ensure your retirement savings grow in value. It gives you financial independence when you’re expected to be a dependent.
Key Components Of Financial Planning
Here are 10 key components of financial planning to help you succeed in your short term and long term goals.
1. Financial Goals
This is an important component of financial planning because it sets out your current and future financial goals. It identifies what you want to achieve, how much money you need and when you will need them. You can classify your financial goals into short-term, medium-term, and long-term goals.
2. Cash Flow Analyses
This will help you identify your inflow, outflow, assets, and debts. This will prevent you from spending more than you earn.
3. Tax Planning
This is also an important component that ensures you enjoy tax reduction on your savings and tax-free returns on your earnings. So you can adequately grow and enjoy your savings.
4. Investment Planning
Growing your savings is a very important component of financial planning. This is what differentiates it from an ordinary savings account. There are different investment vehicles that will help you grow your savings and excess funds and manage the tax implications.
5. Retirement Planning
This component will help you prepare for your inactive days. You can set aside a retirement fund that will be invested to grow over time so you can have enough for when you retire. Your retirement lifestyle, financial objectives, and government benefits are some of the things you will consider when including retirement in your financial plan.
6. Debt Management
This component allows you to manage your debt effectively by ensuring you stay away from high-interest debts and find a way to serve the ones you already have. It will help you design a plan on how to service current and future inevitable debts you may incur.
7. Emergency Fund
This is another component that helps you manage your funds properly. The emergency fund will prevent you from taking out of your other savings and investments in times of emergency. This way, your long-term savings, and investments are intact during emergencies.
8. Estate Planning
This aspect caters for your wishes regarding your assets and investment for when you are no longer around. This gives you the opportunity to appoint who will administer your estate, which must be someone you can trust. It also allows you to determine who gets what amongst your dependents. You may also want to include Powers of Attorney to appoint people that will take health care and financial decisions for when you are incapacitated.
9. Insurance
This is also important because it reduces the burden on your long-term savings and investments. Having insurance for some necessary needs is important. A health insurance cover ensures you are adequately covered when you have health issues. You will not be required to dipinto your savings or even your emergency funds. Other types of important insurance include Disability insurance and Life insurance.
10. Education Planning
This is mainly for your children and possibly your grandchildren. It is usually advisable to start this even before your kids are born. Children grow so fast which is why adequate financial planning is needed for your children’s education. Some of the things you may want to consider include the average tuition for every stage in their education, available student loans and mode of repayment, and educational tax credit. Having a separate financial plan for your children’s education will ensure you don’t have to spend out of your long-term savings and investment.
FAQ
These are the 7 key components of financial planning:
- Cash Flow Management
- Debt Management
- Insurance and risk management
- Investment Planning
- Tax Planning
- Retirement Planning
- Estate planning
