In the modern world, financial planning is not just for the well-off. Anyone can benefit from sound financial planning. In fact, financial planning is essential to building wealth for families, individuals, and businesses. The importance of this planning process cannot be underestimated. In fact, it is advisable to engage in financial planning even if you are not currently wealthy.
In broad terms, financial planning is an assessment of an individual’s present pay level and future financial position by making use of present known factors to predict future income, wealth and expenditure. A sound financial plan includes both long-term and short-term financial goals. These goals should be both realistic and achievable. Ideally, you want your long-term financial goals to be achieved before your children or family members are financially independent. Likewise, you want your short-term financial goals to be achieved before you reach retirement age.
In order to achieve financial planning goals, you need to understand the three major components that make up your financial situation today. These components include fixed income, savings, and investment options. All three major components affect every aspect of your life, although they are sometimes presented in different ways. For instance, fixed income is your wages as of the moment; savings is the money you have saved over time; and investment options refer to the various financial strategies you have taken to increase your investments over the years. Understanding each of these three major components is the first step towards developing a sound financial planning strategy.
To begin your journey towards financial planning, you need to create a workable investment portfolio. Your portfolio should be based on your long-term goals and needs as well as your tolerance for risk. With a clearly defined portfolio in place, you can assess your financial situation and create a set of long-term goals to guide your investment strategy. From there, you can start evaluating the investment options available to you. You may already know what your long-term goals are, but by evaluating your current financial situation along with the investments you currently have in place, you can identify areas where additional investment could be made.
Once you have an established investment strategy in place, you can then use the results of that strategy to help you make long-term decisions about other aspects of your financial planning. A good example of this strategy would be investing in a mutual fund that holds a portion of stocks or bonds that will pay out a specific amount during a specific time frame. By using the information provided by the fund’s portfolio, you can then use the information to predict what stocks or bonds will earn the highest dividends in the future. By creating a realistic timeline, you can invest in those stocks or bonds that will offer you the most consistent return over the long-term. This type of financial planning strategy is a combination of predicting what types of investments will earn high dividends in the present and taking advantage of that information in the future.
Finally, another aspect of long-term financial planning is considering the big picture. Your retirement goal should include a total amount of money that you plan to spend on your retirement, as well as investments for education and health care. If you only have a set amount of money each month to spend on your household expenses and retirement savings, it can be difficult to budget your expenses when the bulk of your income goes towards debt repayments. Therefore, you should create a realistic budget that takes into account both your day-to-day spending as well as long-term investments.