What is Financial Planning?

Do you feel overwhelmed by the complexity of managing your finances? Or do you wish there was a clear path toward securing your financial future? If you’ve answered yes, to either of those questions, you’re in the right place. Speaking to a financial planning consultant could be the next best step you can take.

Financial planning can guide you from where you are now to where you want to be financially. This guide explains what financial planning is and how it can transform your financial life.

What does financial planning and analysis do? 

Financial planning can serve a number of crucial purposes, including:

• Understanding Your Money

Financial planning can help you to understand where your money comes from and where it goes. This clarity is the first step towards making informed decisions. In tracking your income, expenses, savings and investments, you can identify patterns and areas for improvement.

• Creating Plans

Financial planning primarily revolves around creating plans to maximise income, savings and investments. It’s all about how to get your money to work harder for you.  This could mean altering the way in which you spend your money, and/or investing that is in a way that aligns with your goals and level of risk.

• Simplifying Money Matters

Organising your financial life can significantly reduce the confusion and stress that often come with managing money. Rather than reacting to financial situations as they arise, you take a proactive approach to shaping your future.

• Long-term Vision

Financial planning makes you think beyond your short-term needs and plan for the future. This could mean saving for retirement, buying a house or funding a child’s education. With long-term goals, you are assured that the financial decisions you make today will help to provide the life you have in your mind for tomorrow.

• Risk Management

Financial planning enables you to understand and address various financial risks, such as losing one’s job, unexpected expenses or market changes, through the use of insurance, emergency savings, and diversification of investments.

What is included in a financial plan? 

A comprehensive financial plan is tailored to your unique situation but generally includes several key elements:

Current Net Worth

Your net worth is the snapshot of how healthy you are financially at any moment. Here’s what it comprises:

• Assets: All that you own that has value, from cash and investments to property. This includes your home, car, savings accounts, retirement accounts and even personal items like jewellery or art count as assets.
• Liabilities: All your debts, including mortgages, loans and credit card balances. These are what you owe others.

Knowing your net worth will help you understand where you are and compare over time. It is the foundation for some realistic goal setting. For example, your goal might be to get out of debt if your net worth is negative, while a positive net worth might lead you to a goal of building wealth.

Short- and Long-term Financial Goals

It’s like setting the destination of your financial journey. That’s what having definite financial goals is all about.

• Short-term Goals: Examples would be setting aside money for a vacation, building an emergency fund or paying off credit card debts. These can be attained in a few months or a couple of years.
• Long-term Goals: Retirement, buying a house, or college funds for the children require several years of planning and saving.

Goals give meaning to your financial plan. It helps you decide how to allocate your spending and saving, therefore keeping you in the right direction. Without goals, financial planning is purposeless.

Income Plan

Your income is the fuel for your financial journey:

• Current Income: Understanding your income sources and how much you earn. This includes salary, freelance work, investment income or any other regular inflows.
• Future Income: Estimate potential changes in income because of career progression, investments or passive income streams. This helps you to plan for income fluctuations or retirement.

An income plan will indicate how much money you can spend toward your goals and expenses. It is the foundation of a financial plan.

Savings Plan

Savings are both your financial cushion and growth driver. Here is what his part of your financial plan includes:

• Emergency Fund: This protects you against life’s big surprise expenses: blown-up cars, medical emergencies, losing a job. Typically, 3-6 months’ worth of core expenses – in other words, your mortgage or rent, your essential bills and other crucial living expenses.
• Regular Savings: For near-term goals or large purchases like a new car or a down payment on a house.

Savings offer security and an avenue to be able to leverage opportunities without your financial plan becoming derailed. It’s the missing link between income and goals.

Investments Plan

Investments are where your money can grow over time. Planning for this could mean:

• Asset Allocation: Deciding how to spread your investments among various asset classes, such as stocks, bonds and real estate. The process of diversification reduces risk and potentially increases returns.
• Risk Tolerance: Understanding how much risk you’re willing to take to achieve your financial goa It impacts the choice of investments, from conservative government bonds to high-tech volatile stocks.

The base for the creation of long-term wealth and outpacing inflation lies in investments. They are the engines of your financial growth, allowing you to achieve what may seem impossible with savings alone.

With these elements understood and integrated into your financial plan, you are on the right path to controlling your financial future. Remember, financial planning is not a one-and-done event but it is a process that is always in flux, adapting to fit your changing goals and circumstances.

For personalised guidance on creating your financial plan, you can book a no-obligation free financial planning consultation with askpaul. If you’re not ready to take the next step on your financial journey yet, sign up for finance planner. It will help you get a bird’s-eye view of your income, expenses, and overall financial picture.