According to Wikipedia, a financial plan is a comprehensive evaluation of an individual’s current pay and future financial state by using current known variables to predict future income, asset values and withdrawal plans. Financial planning, in simple terms, involves the entire process of meeting one’s goals through proper management of ones finances.
In an organization or a country, financial planning starts from the point of budgeting to collection of taxes and implementation of the budget and lots more macro-economic activities. However, to an everyday person, goals are much more personalized and range from family goals to personal goals and to ultimately life goals. These goals can include personal educational advancement, buying a car, buying a home, saving for your child’s education, planning for retirement or building an empire.
In essence, financial planning is not just for the consultants, economists and accountants; it involves me and you. Every decision we make in terms of finance and money, would reflect in how good our financial planning skills are. In other words, being financially stable is not solely based on how much money you make and how well your business is going but how much of a planner you are. For example, if you earn a million dollars a month and spend a million dollars a month, you are not technically a wealthy person.
In order to really grasp the concept of money creation and wealth accumulation, you need to sit and ask yourself: “what is financial planning to me?” The following would help you understand the entire concept of financial planning in great detail.
What is financial planning to your home?
In the running of a home, the work of financial planning does not solely rest on the shoulders of the breadwinner or the man or woman. It is an all engaging activity. The financial issues include: feeding and home expenses, saving strategies, sorting accommodation payment, educational expenses for kids and many more.
To effectively tackle financial planning issues within the home, it is important to get your finances in order first. Note down all your sources of income and monetary inflows. Then, list out all your unavoidable expenses and required payments to be made in the forthcoming month. These could be insurance payments, laundry expenses, feeding and lots more. Next, you need to save.
Saving involves the setting aside of a particular sum of money for future purposes. Contingencies such as health issues, accidents and immediate financial settlements should be anticipated. Where the family has taken loans or is into a mortgage, payment is crucial. Financial obligations that involve debt to third party individuals should be taken care of immediately, unless they could amount to very extreme problems in a short while.
What is financial planning going to do for you? Well, it helps you achieve your goal. You see, every family has a goal in one way or the other that is aside the individual goals and aspirations of its members. The goals could be securing a big house somewhere advanced, saving for college tuition, getting that dream SUV for the family and so on.
These goals can be long term or short term but they always exist one way or the other. In order to manage your home, create a financial plan that covers repairs, upgrades, mortgages, insurance, and taxes. Financial planning helps you point out those goals and consciously work towards them. It also gives you a sense of independence, stability and direction.
What is financial planning to you?
Whether consciously or unconsciously, we all practice some form of financial planning. We set out how much we have to spend and all the pending things we need to spend on. The entire process of this, revolves around the basis of financial planning. You can, however, manage your income much more effectively by planning properly. Asides managing your income, financial planning would help you seek out new ways to make more money and double your income.
Having multiple streams of income is one way to be a good financial planning. It simply means you have a hedge. Hence, if one fails, you know the other source of finance can sustain you properly for a stipulated period of time. Financial planning keeps you secured. It keeps you protected from negative financial surprises and contingencies.
To effectively have a financial plan, you have to be properly equipped with financial intelligence. You need to understand how money works, understand the proper difference between an asset and a liability. For example, if you are taking loan to buy yourself a car, you are incurring more liabilities. If on the other hand, you take out a loan to pursue a business transaction, then it is an asset. This simple difference has cost so many people financial stability and security.
You have to align your goals and prioritise them. Spend time to think about the likely cost of those goals and when you will need the money, so you can start to plan your finances to work out how to achieve them. Finally, as specified earlier, you have to develop a very good saving habit. Financial planning is useless when all you do is ‘financial spending’. You have to save at least 20% of your monthly income, in order for you to have a sustainable means of livelihood.
Benefits of proper financial planning
The following are some of the numerous benefits of financial planning:
- Financial confidence
- Reduce your stress levels
- Peace of mind
- Improved standard of living
- Cost control
- Timely action
- Makes you result oriented
- Guides your spending
- Helps you make better financial decisions
- Keeps you being realistic
- Helps you meet your needs as at when due
As a home maker or a financially literate individual, understanding what is financial planning is the first step to success, wealth and high standard of living. Just follow the processes and steps explained in each sub-heading and you would be on your way to achieving those goals you so desire.