Financial planning is simply taking strategic steps towards leading a financially stable life. It involves decision taken that aids one to meet both short term and long-term money-related goals. It could be as simple as making plans to acquire a trending gadget or as complex as securing and financing a mortgage. Whatever monetary goals one has, some form of planning is involved although we often do this unintentionally.
No doubt, for one to achieve financial freedom there has to be discipline when it comes to spending. Very often, big time earners who rake in an annual income of above $100,000 struggle to save as low as 10%. While low class earners that average a yearly income of under $50,000 comfortably save up to 30%. From these two examples, it becomes obvious that the latter is on top of their financial planning game. To begin your journey to financial freedom, you might want to consider visiting sites like coastfinancialplanning.com.au or similar sites that provide professional advice on how to live without money-related worries.
Through the course of this article, we’ll look at the types and benefits of financial planning, as well as the steps in creating a financial plan.
Types of Financial planning
1. Cash flow
This is simply the inflow and outflow of money. Cash flow shows where money comes in from (earned), and where it ends up (spent). Many understand this simple concept however, only a few people intentionally monitor this process.
In cash flow planning, short-and-long term goals are identified and steps towards achieving them are carefully laid out to align with one’s income. Before making any significant investment, it is important that this step be taken. By doing so, one can easily know if the investment to be made matches one’s income. This single process gives a person incredible control over spending.
Saving is absolutely necessary for survival today. Without savings, one would literally be going through life on thorns and broken bottles. It helps us absorb whatever shock life may throw at us, and it always does. As important as it is, one may not achieve true financial freedom by only having a fat savings account. To live free without having to worry about money, investments have to be made.
Investments are assets one acquires that appreciate over time. Unlike savings where the most you can get is a mediocre interest, good, long-term investments are capable of bringing in profits in multiples of the amount invested. They are the only way to true wealth and if you so desire, billionaire status.
Investment planning enables an individual to choose strategically, what assets to invest in that would yield big gains in the future. In this planning, the first step is usually analyzing one’s risk and reward profile. This gives you an idea of the level of risk you can accommodate for a given return. To get the best out of your investments, adequate planning has to go into the process.
3. Retirement Planning:
There will come a time when we are no longer capable of working. It’s a fact we all know too well and that’s why we work hard to put aside some retirement funds for those gray old days. If done right, retirement might easily be the best days of one’s life because it is a time to reap the benefits of all the hard work done when one was younger.
To live such a life when you grow old, planning has to begin now. With retirement planning, it is possible to have an idea of how much money one can put away to enjoy a work-free life. Click here to learn more about retirement savings.
4. Children’s future
It takes a lot to properly raise children. As a parent, the best way to do that is by having a plan for your child’s money needs in the future. This often includes education, vacations, and even the child’s wedding.
To achieve all this without breaking a sweat, there is a need for a solid plan. A children’s future plan enables you to efficiently manage your income so that these goals are met at the right time. This management covers both saving and long-term investments.
5. Tax Planning
People lose a lot of their earnings to tax because of poor planning. And while it is illegal to evade tax, it is 100 percent legal to minimize tax. This process is called tax minimization. It involves the use of legal methods to cut down the amount of tax an individual or company pays. A few ways this can be done are:
· Investing in a retirement account
· Claiming business tax deductions
· Planning a business trip together with a vacation
· Donating to charity
Benefits of Financial Planning
1. It helps one to set and achieve monetary goals.
2. Through it, retirement funds can be secured
3. It allows for efficient management of cash flow and income
4. It helps one achieve financial literacy and discipline
5. Peace of mind
How to Create a Financial Plan
Figure out your current financial situation
Before anything else is done, you must have a record of your income source or sources, any debts you owe, your expenditures, investments, and savings. Once this is done, you will get a clearer picture of what needs to be done.
Set your goals
With step one out of the way, your monetary goals should be set and penned down. It is extremely important that these goals be specific. That is, they should have actual values and a time frame within which they would be achieved. For example, one of such goals could be buying a condo worth $15,000 in the next 12 months. You get the point. Making these goals specific puts you on your toes and motivates you.
You cannot be financially free when you have debts hanging around your neck. If you have unsettled debts, make sure they are paid off before moving on to the next step, which is investing
Explore different investment options and execute the right one
There are so many investment options available to people today. They all have their risks and rewards. This step requires time and study. Before you pick an investment, make sure you are able to afford it. Make sure you can live comfortably for the duration of the investment without the money invested. Popular investments these days are stocks, mutual funds, and exchange-traded funds (ETFs).
The right option for you is the one that aligns with the goals you’ve set. Pick the option that is most likely to make you the money you need within the set time.
Contrary to popular belief, it is possible to achieve financial freedom and that at a younger age than you expect. It requires dedication and hard work, that’s for sure. However, having to do whatever you like without peeking at your pocket should be enough motivation.