We’d like to clear up the unfortunate misconception that financial planning is a service which only benefits the wealthy. The truth is that having a financial plan, either one you’ve crafted with the help of experts or one you’ve made on your own, will benefit you no matter your income level. In fact, a good personal financial plan could even be the tool you need to help you reach a higher income bracket. And yet, according to the 2012 Household Financial Planning Survey conducted by the Certified Financial Planner Board of Standards, only 31% of financial decision makers in families say they have created a comprehensive financial plan. The CFP Board survey showed that when people take a step back to look at their financial picture as a whole (which means examining spending habits, savings, emergency accounts, investments, insurance needs, retirement plans, and other projected future expenses) they become much more equipped to pay their bills and debts while also saving and living comfortably.
There’s a lot to consider when creating comprehensive financial plans and operating under the impression that some of your financial goals are far off in the distance might discourage you from getting a head start. Don’t let it! Financial planning can help you, even if you are in your twenties. The earlier you start planning, the less mistakes you’ll have to deal with later on. Although paying for things like retirement, a house, a child’s education might not be something you have to do for years, it takes years to save up enough funds to do them. A lot of people fail to achieve their goals simply because they didn’t give themselves a reasonable, attainable timeline to do so.
There’s no way around it; you have to plan today to prepare for tomorrow. Still not convinced this is the way to achieve your goals? Before you completely dismiss the idea, check out our top six reasons why you should make a personal financial plan...
- To Reach an Understanding
The basics of making a financial plan are first, set your quantifiable goals and time frames. If you really want to achieve something, you’ll likely have to put some thought into how exactly you're going to do so, such as deciding on how much money needs to go into what vehicle when. Next, monitor your expenses and spending patterns. You might think you know how much you’re spending on overpriced lattes each week, but you won’t know for sure until you actually do the math. Finally, review the results and repeat. Measure the progress you’ve made toward achieving your goals in order to understand what’s been successful as well as where you can make improvements. You should be conducting this review of your expenses annually, if not every six months.
- To Discover Missed Opportunities
Having a professional and an outsider look at your finances might reveal missed opportunities for financial growth. Doing the deep dive instead of simply checking your bank statements will help with this. For example, have you really thought about your workplace benefits? They are important to factor in because benefits generally range from 30% to 40% of your cash compensation, so making uninformed decisions about them can greatly affect your income and lifestyle. For example, do you have the best insurance policies for you and your family? Are you taking advantage of any flexible spending plans? How about 401(k) matching? Are any stock options being offered to you that would be wise investment decisions? These are things that a comprehensive financial plan will bring to light for you.
- To Improve ROI on Your Portfolio
Integrating your long-term goals and risk appetite into your investment plan is part of the process of financial planning. Because of this, you will be much more informed and able to make investment decisions with a well-rounded perspective. This means you’ll be much more likely to choose the right mix of assets for you.
- To Take Care of Your Family
Making a personal financial plan can positively affect your entire family, both in the near future and even further down the road. It’s always tough to talk about what will happen to your loved ones after you pass, but it’s best for everyone involved if you discuss the topic ahead of time. Personal financial and estate planning can help you be sure of your family’s future. A good financial plan requires you to assess your will, trusts, beneficiary designations on retirement accounts, and keep your insurance policies up to date.
- To Prepare for an Emergency
Many people assume that tragedy won’t happen to them, until it does. Financial planning can help to provide you with a safety net. It’s never fun to be low on funds, but it’s particularly upsetting during an unexpected turn of events, such as an illness, layoff, or natural disaster.
- To Enjoy Retirement
You’ve probably heard this one before, but you must plan for retirement well in advance of reaching retirement age, especially when it comes to investing. To make the magic of compounding work for you, you need to start early. A comprehensive financial plan can show you how you should be investing in preparation as well as all the other ways you could be tucking money away for the future.
In conclusion, think about reaching your financial goals the way you think about going on vacation. Most people plan it out, either with detailed itineraries or by simply picking a destination and getting in the car. If you’re spontaneous, you usually at least know where you’d like to end before you begin. If you’re extra organized, then you’ll even know exactly how you’re going to get there.
You should spend at least as much time planning your financial future as you spend on planning one short trip. The thing is, if you attempt to research this subject on your own, you may spend a lot of time and energy on the project only to receive contradictory advice from various sources. Instead, consider meeting with a fee-only fiduciary financial advisor. They’ll assist you in creating your personal financial plan and see it through, because when your life changes, your financial plan should too.