What Is Financial Planning?

Even if you’ve heard people refer to financial planning in the past, you may not know exactly what this process entails or whether the financial practices you are currently using fall underneath this broad umbrella term.

Though financial tasks such as balancing a checkbook and setting up a spending budget are important skills to master along your financial journey, financial planning is a more comprehensive and future-focused process that lays out a long-term blueprint for how you will manage your money over time.

If you’ve never met formally with a financial planner, you may be overlooking important parts of money management and long-term planning. Read on for an introduction to the financial planning process.

What Is Financial Planning?

When you meet with a financial planner, you will be starting a partnership that aims to optimize your financial opportunities in life through strategic money management aligned with your financial needs, challenges, and goals.

Rather than focusing on one aspect of your finances, such as money management, financial planning accounts for every aspect of your financial picture. This includes everything from monthly spending to emergency funds to retirement savings and estate management.

Financial planning also includes scenario planning to help you account for various events or challenges you may face along the way. Medical expenses, losses of income, and other events can disrupt your existing financial plans and force you to adapt, but solid scenario planning can help you anticipate these hurdles before they occur.

The Importance of Short- and Long-Term Financial Planning

It is possible to manage your money wisely on a day-to-day basis without fully embracing financial planning, but there are many important benefits to having your entire financial situation addressed through the financial planning process.

For example, financial planning helps you connect short-term decisions to their long-term implications—especially when it comes to big financial events such as buying a house or saving for retirement.

Long-term financial goals are a product of short-term decision-making, and understanding how much you need to save and invest right now is often difficult without the right tools and expertise to forecast your future needs. Financial planning helps in this regard, while making sure you aren’t overlooking any financial challenges or needs that may arise over time.

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Basic Elements of a Financial Plan

If you want to create a comprehensive financial plan that lays out your short-term financial goals and needs as well as your long-term financial plan, you’ll want a financial plan that covers the following topics:

Your Current Net Worth

A financial planner can add up all of your current assets and liabilities to determine your current net worth, which will be important when calculating long-term savings goals.

Your Current Spending Budget and Monthly/Annual Income

Monthly and annual spending, when contrasted with your income, will help you build an actionable plan for saving and investing over time.

Your Financial Goals 

Buying a house? Hoping to retire early, travel a lot in retirement, or both? Identifying these goals will be critical when developing your financial plan.

Your Emergency Fund

Are you prepared to withstand a loss of income? An emergency fund will help you weather financial shortfalls without racking up debt or facing other financial struggles.

Your Saving and Investing Plan for Reaching Those Goals

Once you’ve identified your long-term financial goals and your capacity to build toward those goals by saving and investing, you can map out this plan and set specific savings goals for yourself.

Retirement Planning, Including Spending and Income Forecasts

How might your income increase over time? What about your living costs and care needs in retirement? When setting your target retirement age, you will also need to account for how your income and expenses may change over time, both during your working years and once you’ve entered retirement.

Estate Planning

How will your estate be divided or managed after you’re gone? Estate planning is crucial when making sure your surviving loved ones will receive distributions and support from your estate, along with helping you settle other important end-of-life decisions.

Perfect Your Plan

Even if you’ve started out handling your own financial planning, there’s value in working with a professional to solidify this planning process, make sure you’re on the right track, and optimize money management, investing, and other strategies to maximize your net worth later in life.

The sooner you take control of your finances, the better off you’ll be in the long run. Ready to improve your money management habits? Explore our resource “A Complete Guide to Budgeting” today.

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