What is Financial Planning and Why Do It?
Financial planning sounds like a task for those heading into retirement or for those with great wealth, but this is far from true. Whether you’re 22 or 62, creating a financial plan can lead you and your family toward financial success. So, what is financial planning? Well, it may look different from person to person, but getting familiar with the basics is a great place to start.
Starting Where You Are
It’s overwhelming to think of college expenses, credit card debt and saving for retirement as one giant goal. Trying to tackle everything at once will only leave you feeling defeated. Instead, start with what’s on your plate today. If you have one, refer to your budget and make sure that all of the data is up to date. If you have a different income or a change in your expenses, adjust them to be accurate. If you don’t have a budget, this is the perfect time to make one. A budget is your foundation for financial planning.
Name Your Goals
This is when you start to think about all of your financial aspirations. Think about what you want to achieve and be as detailed as possible. The more you can visualize your goals, the easier it is to stick to your plan to achieve them. In fact, according to Forbes, you are 1.2 times more likely to achieve your goals if you write them down! It’s perfectly fine to have more than one goal but remember to be specific. Expand on statements like, “I want to save more money,” to “I want to increase my IRA contribution to five percent by the end of the year.” Your goals are what keep you motivated to stay on track.
Create a Plan
It’s important to look at all goals—both long-term and short-term—and decide which to tackle first. Some people choose to notch off short-term payment goals like an unexpected medical bill or car repair, prioritizing manageable expenses before larger ones. Doing so also gives you a sense of accomplishment that can reinforce your efforts. However, don’t forget to take into account interest rates and penalties of any long-term payment goals. With high interest rates, credit cards are notorious for having you pay a large sum in interest. Prioritizing the goals with the highest interest rate, or seeking a loan to consolidate your long-term and short-term goals into a lesser interest rate, may pay off—literally—more than paying each off individually.
Your financial plan and budget shouldn’t be set in stone—they should be flexible and adaptable to life’s ups and downs, surprise expenses or self-care splurges. When things come up that you didn’t plan for, go back to your budget and financial plan and adjust to keep your goals on track.