Planning for the financial future helps people in many ways, including improving their ability to set goals, budget, save, borrow wisely, invest, manage risk and taxes, plan their estates and more. People who create financial plans are better able to reach their life objectives, make major purchases, provide for children’s education, retire comfortably and handle emergencies. Financial planning reveals reality, imposes discipline and exposes people to potentially helpful strategies they may not have considered.
To learn more about financial planning, contact a financial advisor.
Financial Planning Basics
Financial planning involves assessing your current financial position, goals and priorities and developing a road map for how you can most comfortably get from where you are to where you want to be. Financial planning involves much more than selecting investments, although that is often a part of a financial plan. It also goes beyond simply accumulating personal wealth, since it also takes into consideration your personality and individual preferences as well as your responsibilities to family and, often, desires to help other people and society in general.
While remaining focused on money, financial planning touches many areas of existence. The elements of financial planning include:
- Setting goals
- Spending within your means – budgeting
- Preparing for emergencies
- Borrowing wisely
- Managing taxes
- Investing appropriately
- Managing risk
- Funding educational needs
- Accumulating funds for major purchases
- Providing for comfortable retirement
- Estate planning
- Supporting charitable causes
Financial Planning Benefits
One of the first and most useful benefits of the financial planning process is the way it requires you to evaluate your present position. Creating a balance sheet by adding up your assets and subtracting liabilities gives you your net worth, evaluating your expenses and income sheds light on your cash flow and is essential for budgeting.
Financial planning also calls for identifying and prioritizing your goals. Deciding whether it’s more important, for instance, to retire early or to acquire a second home is essential to making decisions that will improve your chances of reaching long-term financial satisfaction.
Providing for savings is fundamental to financial planning. A budget typically includes setting aside amounts for emergencies as well as building a nest egg for after you stop working. Saving for short-term goals such as buying a home and exploring ways to pay for a child’s education are also key parts of a typical financial plan.
Financial planning involves understanding and accommodating your personal risk tolerance. Knowing whether you are comfortable with potential declines in the value of investments can help you decide whether to emphasize equities or fixed-income securities in your investing portfolio, for instance. Risk management also will call for using insurance, diversification and other tools to protect against financial losses.
You’ll be able to reduce the costs of taxes by positioning yourself to make best use of deductions and other tax strategies. And, rather than buying and selling investments on the basis of tips and unproven strategies, you’ll see how a disciplined long-term investment approach can assist you in reaching you goals without taking on so much risk that you can’t sleep at night.
Financial planning also addresses the end of life and beyond. An estate plan prepared as part of your overall financial plan will help you make sure dependent children are taken care of with the help of the assets you have acquired. You’ll also be able to support charitable organizations and causes you care about and create a legacy that honors your life and wishes.
The Bottom Line
Financial planning has benefits that range from helping you make ends meet on a monthly basis to avoiding high-cost debt and providing for loved ones and favorite causes after you are gone. Developing a plan starts with evaluating where you are and what you want to accomplish, then moves into assessing specific ways to achieve your financial goals. A well-done financial plan provides a road map for using budgeting, insurance, investments and tax strategies to find ways to save, reduce risk of loss and make difficult challenges doable.
Financial Planning Tips
- A financial advisor has the training, experience and tools to help you create a financial plan that will set you on the path to prosperity. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Financial planning only looks like it is just about dollars and cents. It also helps with confidence and inner peace. A 2021 survey by Schwab found nearly two-thirds (65%) of people who had a written financial plan felt financially stable. Just 40% of those without written plans felt similarly comfortable. And most (54%) of people who planned were very confident of accomplishing their financial objectives, three times the 18% without plans who were equally confident.
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