What is Financial Planning? Financial Planning is the process of allocating money for the different goals set over a period of time. Several businesses engage in financial planning, and since I want you to think of your personal finances as a business, it is very important for you to have a financial plan too. I have seen several situations where improper financial planning have led people to make drastic and bad decisions on their personal finance. These are the reasons why it is not only necessary for you to set goals, you also need to plan for the future.
It helps you to prepare for future lifestyle goals: As a young adult, you are overwhelmed with a new job, and an increase in income. You have several needs allocations for your income. There is student loans, credit card debt, emergency fund, retirement savings etc, and you do not know where to start from. You also have other things to think about. Do you want to buy a home? Are you getting married soon? Have you been dreaming of your wedding day since you were a toddler? Knowing the answers to these questions will put you on a path to meeting those goals.
It helps you set a timeline for these goals: How soon do you need to achieve these goals? Do you want a house in the next five years? Are you planning to get married in the next three years? Having a timeline for your goals helps you to know what percentage of your income to allocate to the goals. You do not want to be maxing out your 401k every year when you have a dream of a goal of buying a house in the next two years without allocate any income to your housing expenses.
It gives room for flexibility when something goes wrong: When you lose your job or you are sick and could not work, you are still secured in your finances. A sudden change in your finances doesn’t change a lot at once.
It reduces your anxiety towards money: You will be calmer when you know you don’t need to worry about money. Your mind will be be at peace, and every other aspects of your life will run smoothly and be at ease.
Finally, having a financial plan gives you a better sense of control towards your finances. You are able to budget more, track your spending efficiently, remove excesses, and save and invest more. This is because it gives you an urgency towards meeting your goals.
Do you have a financial plan? Are you in your 20s or 30s? If you don’t, what better time to start other than now.