Financial planning is the act of thoroughly reviewing your financial condition and developing a precise financial strategy to achieve your objectives. As a result, financial planning frequently covers a wide range of financial topics, including investing, taxes, savings, retirement, estate planning, insurance, and more. As one might think, a financial planner primarily provides financial planning services; nonetheless, financial counselors frequently double as planners.

What Is Financial Planning?

Financial planning is the process of creating a plan for your future, specifically how you will manage your finances and prepare for any prospective costs or challenges that may come. The process entails assessing your present financial condition, determining your objectives, and then creating and executing appropriate recommendations.

Financial planning is holistic and broad, and it can include a range of services, which we will discuss below. Rather than focusing solely on one element of your money, it sees clients as genuine people with a wide range of goals and obligations. It then covers a variety of financial realities to determine how to best help people make the most of their lives.

Financial planning and asset management are not the same. Asset management is commonly defined as the management of a client’s investments. This includes selecting the stocks, bonds, mutual funds, and other investments in which a client should place their money.

However, asset management specialists can also provide financial planning services. A financial planner is essentially one form of financial advisor. Advisors can receive financial planning-specific credentials, the most renowned of which is certified financial planner.

Types of Financial Planning

A financial planner may provide a variety of services to you. These services are often regarded in conjunction with one another. This allows the planner to create a comprehensive strategy that takes into account all aspects of your current status and future goals.

Here are eight common services that are typically provided as part of financial planning:

• Tax planning: Financial planners often help clients address certain tax issues. They can also figure out how to maximize your tax refunds and minimize your tax liability. Certain advisors may also be able to actually help you with preparing your taxes and filing your annual taxes.
• Estate planning: Estate planning seeks to make things a bit easier for your loved ones after you die. Preparing a will may be part of a financial planner’s services. Estate planning also helps prepare for any estate tax you may be subject to.
• Retirement planning: You presumably want to stop working someday. Retirement planning services help you prepare for that day. They ensure that you’ve saved enough money to live the lifestyle you want in retirement.
• Philanthropic planning: It’s always nice to give something to people who need it or help a cause close to your heart. Financial planning can help you ensure you’re doing it efficiently and getting all the tax benefits you’re eligible for.
• Education funding planning: If you have children or other dependents who wish to pursue a college degree, you may want to help them to pay for it. Financial planning can help make sure you are able to do so.
• Investment planning: Though financial planning doesn’t have to include the actual management of your assets – but most often does – it can still help with your investment portfolio by mapping out how much you should be investing and in which types of investments.
• Insurance planning: A financial planner can help you evaluate your insurance needs. Some financial planners are also licensed insurance agents and can sell you insurance themselves. However, they’ll likely earn a commission, which would create a conflict of interest.
• Budgeting: This is perhaps the cornerstone of financial planning. A planner can make sure you are spending the right amount given your income and can also make sure that you aren’t going into debt.

The exact services offered by a financial planner will vary based on the individual. Make sure the financial planner you choose offers the services you need.

How to Create a Financial Plan

Certain steps are necessary to create a financial plan and an investment plan.

1. Do It Yourself or Get Professional Help

Decide whether you’ll create your financial and investment plans on your own or with the help of a licensed financial planner. You can certainly build a financial plan but a financial pro can help ensure that your plan covers all the essentials.

2. Build an Emergency Cash Fund

Start setting aside money in a liquid account based on what your cash flow allows. Your goal should be to save enough to cover all your expenses for three to six months at a minimum but preferably for longer in case you find yourself without income due to unexpected events.

3. Plan to Reduce Debt and Manage Expenses

The faster and more effectively you can eliminate debt, the better for the growth of your savings, your standard of living, and for the achievement of your specific investment objectives.

Make it a habit to cut expenses whenever and wherever possible so you can add to your savings. Stay on top of those that you know you’ll have, such as taxes, so you always meet those obligations on time.

4. Manage Potential Risks

Your financial well-being can be affected when accidents, health problems, or the death of a loved one strike. Plan to put into place the appropriate insurance coverage that will protect your financial security at such times. This coverage can include home, property, health, auto, disability, personal liability, and life insurance.

5. Begin to Invest

Take part in a retirement plan at work that automatically deducts contributions from your paychecks. Plan to maximize your tax-advantaged investing with a personal IRA if and when your income allows.

Read Also: The Role of Stocks in Wealth Creation

Consider how you might allocate any other available income to a taxable investment account that can add to your net worth over time. Your plan for investing should take into account your investment risk tolerance and future income needs.

6. Include a Tax Strategy

Address the goal of reducing your income taxes with tax deductions, tax credits, tax loss harvesting, and any other opportunities that are legally available to taxpayers.

7. Consider an Estate Plan

It’s important to make arrangements for the benefit and protection of your heirs with an estate plan. The details will depend on your stage in life and whether you’re married, have children, or have other legacy goals. Again, a professional such as an attorney can help here.2

8. Monitor and Adjust Your Plan

Revisit your plan at least yearly on your own or with a financial professional. Do it more often if a change in circumstances affects your financial situation. Keep it working efficiently and effectively by adjusting it as necessary.

Investment Planning

Whether you’re going it alone or with a financial advisor, you must grasp the importance of financial and investment planning for your financial future. They can offer counsel that ensures your financial success.

Begin your planning process by compiling information from your numerous financial accounts into a paper or spreadsheet. Then do some basic math to determine where you stand financially.

1. Calculate Your Net Worth

To calculate your current net worth, subtract the total of your liabilities from the total of your assets. Begin by listing and adding up all of the following:

• Your assets: An asset is property of value that you own. Assets may include a home, a car, cash in the bank, money invested in a 401(k) plan, and other investment accounts.
• Your liabilities: A liability is something you owe. Liabilities may include outstanding bills, credit card debt, student debt, a mortgage, and a car loan.

2. Determine Your Cash Flow

Cash flow is the money you take in measured against the money you spend. You must know your income as well as how and when your money is spent to create a financial plan and then an investment plan. Documenting your cash flow will help you determine how much you need every month for necessities, how much is available for saving and investing, and where you can cut back on spending.

Review your checking account and credit card statements. They should provide a fairly complete history of your income and spending in a wide range of spending categories.

Document how much you’ve paid during the year for housing expenses like rent or mortgage payments, utilities, and credit card interest. Other categories include food, household and clothing, transportation, medical insurance, and non-covered medical expenses. Still others can include your spending on miscellaneous entertainment, dining out, and vacation travel.

You’ll know what your monthly cash flow has been and where you can improve it when you’ve added up all these numbers for a year and divided the total by 12.

3. Establish Your Goals

A major part of an investment plan is your clearly defined goals. They might include funding a college education for the children, buying a larger home, starting a business, retiring on time, or leaving a legacy.

No one can tell you how to prioritize these goals but a professional financial planner should be able to help you finalize a detailed savings plan and specific investing that can help you reach them one by one.

What is Wealth Creation in Financial Planning?

Wealth creation is the process of building wealth utilizing a variety of financial instruments. Long-term investments in financial items yield higher returns. As a result, it is a necessary component of your financial journey in order to reach all of your long-term financial objectives, such as your dream home, your child’s school, and much more.

Wealth creation is essential for a number of reasons:

1. It provides you with money to fulfil your future goals.
2. It offers a steady flow of income even when you are no longer employed or working. This can be a great way to ensure financial liquidity and help your loved ones to continue to live a life of comfort, abundance, and security.
3. Retirement can be a challenging phase with increasing medical and daily expenses. However, with wealth creation, you will never experience a financial crunch and be independent for as long as you live.

Below are some reasons that make wealth creation important:

Helps secure your financial future

Wealth creation helps you set the foundation for your future financial security. It helps you accumulate wealth for different financial goals, including retirement, your children’s higher education, house ownership and more. It enables you to achieve these milestones within planned timelines to ensure a stable and prosperous future.

Helps prepare for unforeseen circumstances

Wealth creation helps you plan for unexpected financial needs arising from emergencies, such as job loss, business setbacks or health issues. It avoids the need to take debt and makes you financially secure no matter what life throws at you.

Helps to improve quality of life

A well-executed wealth creation plan enhances your lifestyle and overall well-being. It enables you to enjoy the things you value, such as traveling, socialising, entertainment and more, while also contributing to better healthcare and education, thereby enhancing your quality of life.

Helps in passing the wealth as inheritance

A wealth creation plan enables you to pass on your legacy to future generations and ensure their financial well-being, even in your absence. Accumulated assets and wealth can be preserved and transferred to heirs, providing a lasting impact on their lives.

When it comes to long-term wealth creation, the following measures can be helpful:

• You should start by setting a financial goal for yourself. Keep in mind that your goal needs to be realistic and should promote long-term wealth creation. When you set a goal, make sure that you choose an appropriate timeline for it too. So, you can achieve them without being frustrated or facing disappointments.
• The power of compounding forms the foundation of long-term investments. The power of compounding is a concept that will help in building a considerable amount of money in the future. The concept of compounding revolves around reinvesting the returns back into the initial investment to earn higher growth. As a result, the earlier you start investing, the higher will be the rewards. No investment is too small. So, regardless of your income, you must begin your journey at the earliest to create a sizeable amount of money.
• Consistency can go a long way. This is why you must remember to invest periodically. Monthly, quarterly, half-yearly, or yearly plans can turn into substantial investments over time, without creating a burden on your present needs or wants.
• Having a well-balanced and diversified portfolio will guarantee that your risk is under control. Keep a combination of debt and equity funds in your financial plan to eliminate the threat of market fluctuations and unexpected losses.

Conclusion

A financial plan is an important instrument for your financial well-being today and in the future. It entails documenting your existing financial situation, as well as your numerous financial goals and techniques for achieving them.

It is never too early or too late to have a financial strategy. It can assist you in determining the best method to put it to use so that you can fulfill your financial needs at all periods of your life, regardless of how much money you have.