The importance of financial planning
Guest Author: Sarah Barnett writes on a wide range of personal finance subjects, from credit cards to budgeting.
If you would not take a trip to a strange place without a map, why would you take a trip to an uncertain future without your financial planning strategy? Financial planning is your map to a secure future, and without it you may either get lost or end up perpetually in debt and unhappy.
Like trip planning, financial planning requires a few basic steps:
- Decide where you want to end up financially, your destination
- What side trips, stops along the way, or treats that you wish to explore
- Set dates for achieving milestones, or goals along the way
- Determine which financial vehicles will provide the best means for getting you to your goals
- Know when you have reached your destination
What is your financial destination?
Before you can figure out where you want to go, it is important to know where you are right now. Are you in debt? Do you have children heading to college soon? What current demands are there on your budget? Do you have a budget? There are some great questions to begin with, so get started!
Where is your beginning location; where are you now?
Make a spreadsheet listing all your current financial obligations and debts, plus assets. Include monthly recurring bills like rent, food, gasoline, credit cards and loans, and other items. List items in columns, show totals and include due dates. For credit accounts, show both monthly minimums and total balances. The difference between what you owe and what you own (asset values) is your net worth.
What is a budget and why is it important?
A budget is simply your trip planner. It lays out plans for spending your disposable monthly income. It should include regular expenses, savings, special expenses and extra income left over.
Food, housing, apparel, medical/dental, vehicle, gasoline, insurance, utilities, school expenses, entertainment, saving, gifts, retirement, investments and emergencies are common expense categories. A budget is an important way to monitor and control your income.
Why set target dates or milestone goals?
Setting a target date and monitoring along the way allows you to arrive on time at your goal. If there is a milestone goal, such as building a comfortable retirement nest egg, you get there one step at a time over time.
How does one accomplish this?
Investigate various financial vehicles such as stocks, bonds, savings, investments, real estate, insurance and other financial tools. Stay on the safe side, away from risky schemes and charlatans. Slow and steady always works. Use compound interest on savings over decades to increase savings.
What is the final outcome?
When you have reached your destination, your targeted goals, you have arrived! By long term financial planning, everything should be improved for you and your family. This is why financial planning, at any income level, can be an important and significant benefit to all.