If you ask an average person “what is financial planning,” they would probably give you an answer that involves budgeting your money.
Sure, budgeting is important, but it’s only one small part of an ideal financial plan example.
Financial planning goes far beyond daily – or even yearly – budgeting. It involves setting long-term goals and executing a plan to achieve these goals.
Read on to find out what is meant by the term financial planning and what you can do right now to take the first step towards future success.
What Is Meant by the Term Financial Planning?
No matter what your goals are, financial planning can help you achieve them. Some people want to save money for their kids to attend college while others simply don’t want to work every day until they die.
A financial planner can’t make money appear out of thin air or change tax laws to your benefit. In fact, you may experience unfortunate circumstances that throw off your entire plan like losing a job or incurring medical expenses.
Does this mean you shouldn’t bother with financial planning? Absolutely not. It does mean that your financial plan should provide some flexibility.
Your financial situation can change in an instant and develop a financial plan can actually be a huge lifesaver if something drastic happens.
What Is Financial Planning?
Now that you understand what is meant by the term financial planning itself, let’s take a look at what financial planning includes.
Everyone’s financial situation is unique so there isn’t anyone right or wrong way to create a financial plan example. Every one of you reading this has different goals, assets, income levels, and responsibilities.
Here are a few things financial planning includes:
- Monitoring your cash flow: Money flowing into your accounts from income and money flowing out for expenses. This is usually monitored on a month-to-month basis.
- Your net worth: Your current financial health based on assets, liabilities, insurance, taxes, income, expenses, and debt.
- Retirement planning: Creating a strategy for sustainable financial security post-retirement. (You can’t rely on social security payments.)
- Investment opportunities: This is usually done on a long-term basis with a specific strategy based on your cash flow, expenses, liability, and other factors.
- Tax planning: How can you work within the current (and always changing) tax code to minimize your responsibility?
- Estate planning and wealth transfer: What will happen to your assets when you pass? This could include forming a will, trusts, power of attorney, and other options to reduce the amount loved ones will lose to taxes.
Why Is Budgeting Important for Success?
Your budget fits into your cash flow process. Why is budgeting important for success? Because it looks at the money you have right now.
Budgeting is important for tracking daily, weekly, or monthly expenses. It allows you to see your money coming in and going out in real time so you can have enough for the things you need.
Budgeting also allows you to see where you can splurge on non-necessities without running out of rent money next month. It is an important factor in long-term financial planning.
What Is the First Step in Financial Planning? Here’s a Financial Plan Example to Get You Started
Although the details of all plans differ, professional financial planners usually stick to a concrete six-step process.
This is good news for people reading this and asking themselves “what is the first step in financial planning” because it provides a starting point. This valuable information can get you started on your own terms.
- Establish the goal: What is your goal? Saving for retirement, your kid’s college fund, or opening a business? If you’re meeting with a planner, you’ll determine the nature of your relationship, ultimate goals, and create a foundation.
- Gather data: You’ll need to get all your financial information in order. If you’re doing this yourself, you should enlist the help of some cloud-based software.
- Analyze the data: What do you need to do to achieve the goals you’ve set? How long will it take you to reach these goals?
- Develop a plan: This is where a planner will usually offer recommendations such as investment opportunities, concerns about your current budget, and long-term asset liabilities.
- Implement the plan: If you agree with the planner’s recommendations, you’ll work together to put them into action. You may end up reaching out to other professionals such as attorneys or tax advisors.
- Monitoring and repeat: How is the plan working? Do things need an update? Has your financial status changed?
It is possible to create a financial plan on your own but there’s also an entire industry devoted to this topic. Finding an experienced and realistic financial planner can help you put all of your finances in order, guide investment opportunities, and set a timeframe for achieving your goals.