When one says something about financial planning, two conflicting thoughts suddenly appear. The first one is like “Whoa, that’s for wealthy people only.” And the second one is “Anyway, it must be too simple – anybody can do it.” The catch is that both assumptions are erroneous. Remember this fact if you want to handle your money properly — be it your savings, cash loan, or investment funds.
You don’t have to be rich to have a financial plan. A perfect spending-earning balance is the key to success for anyone. However, it’s not an easy task to work out a plan. Moreover, it’s way too difficult to stick to it. But “failing to plan is planning to fail” so… Let’s try to understand why financial planning is a must for almost everybody.
The Idea of Financial Planning
It’s obvious that humans can’t predict the future with 100% accuracy. Especially, it’s true for finances. You can have a nice job with significant income, social insurance, and so on. But the ill twist of fate may destroy it all at once. Just take a look at possible scenarios:
- Dismissals due to professional incompetence, age, disability;
- Illnesses, both light and incurable, with different consequences;
- Natural disasters like floods, earthquakes, tsunamis, and tornadoes;
- Various conflicts, including but not limited to revolutions and wars.
All of the above may leave you with empty pockets, without a home and other property. To partially protect yourself and your family from various unpredictable threats, think about financial planning. It comes with saving, rebalancing your spending, and investments. A good plan can help you mitigate financial risks, reduce stress, and accumulate reserve funds. In a nutshell, it makes your money work.
Top Reasons Why Planning is Crucial
The following five points show the importance of financial planning clearly. They are universal, ubiquitous, and definitive for different gender/age/social/professional groups. Of course, there are direct and indirect factors that affect our lives so you should consider them, too. But these reasons should be enough to convince you.
1. Credits and Online Loans
You never know when you will need money. Often, even rich people can’t gather enough to cover all emergency expenses. That’s why the banking industry earns from crediting and lending. Surely, you want to have some reserve funds in the case of taking a loan. This money can help you repay credits or return debts without issues. Moreover, this approach will help you build a good credit rating that is essential for large loans like mortgages.
2. Financial Knowledge
Probably, the lack of knowledge is one of the most painful problems today. We know how to earn money but don’t know how to keep it or optimize. Financial plans (especially, those provided by professional advisors) help you master this. By planning, you can understand how to make wise decisions, trace consequences, and avoid undesired outcomes. It can help not only in budgeting but in daily life, too.
The global inflation rate has been positive for at least thirty years. It destroys the value of your savings if you just keep them. Financial planning usually suggests making your money work, i.e. investing it in stocks, bonds, various assets, and even cryptocurrencies to protect from inflation. With enough knowledge, it’s possible to make a profitable portfolio that doesn’t require you to trade — you can just hold it.
4. Personal/Family Security
Well, everybody wants to live a long and happy life. Moreover, we all want the same for our close ones. Financial planning allows you to save funds and help your family at tough moments. Proper insurance coverage, reliable policies, reserve funds with quick access — these can help during emergencies. With this financial airbag, it’s much easier to know that your family is safe.
5. Safe Retirement
Yeah, we will talk about this point more. Early retirement is a new trend among millennials and even Gen Z representatives. People around the world join the FIRE movement focused on financial independence and retirement at their own will. A comprehensive plan started as early as possible can help you avoid long routine work during your life. It’s possible to build an investment portfolio and save enough to retire at 35 or 40.
Main Steps to a Perfect Plan
Okay, now, it should be clear that financial planning is a highly required thing for nearly anybody. But how to run it correctly? Let’s assume that you have only basic knowledge of finance but want to start planning. Here are five simple steps to begin:
- Gather financial info. You want to know a net worth, i.e. cash plus investments plus other available assets minus existing debts. Also, know about the cash flow related to your income and spending. Ideally, divide credit and debit by categories: food, rent, travel, etc.
- Set your goals. Think about what you want to achieve. A new car? University education for kids? A world tour? Retirement at 35? Each plan has its final goal so be precise, adequate, and ready to change your life.
- Imagine three stages. Make your goals more detailed and divide them into three groups: immediate (like building an initial budget), medium-term (for instance, reducing a credit card debt), and long-term (early retirement).
- Check the plan regularly. After the goals are set and you have a clear vision of your money flow, just stick to the plan. If you want a new house, save some money each month or limit your expenses. Check the goals regularly and optimize them.
- Update goals. Also, financial plans can’t be static. As long as your life changes, the plan should also adapt to it. Got a new job with a higher salary? Save more for retirement. Have to pay for medical services? Allow yourself to save less this month.
For higher convenience, use planners. A simple notepad will be enough but we’d suggest a desktop/mobile app that can track your expenses, categorize them, and notify you.