Due to the uncertainties associated with one’s personal and financial standing, there is a need for apt planning. Financial planning is defined as the “process through which a person moves towards attaining personal and financial goals through the development of a comprehensive financial plan” (Swan, 2004). It can also be defined as the steps undertaken by an individual that is keen on planning his or her future. It is borne out of the need to direct and plan for a person’s resources to accumulate and grow assets so that they meet set financial goals. Financial planning is a fundamental life skill to aid an individual to take better control of his or her financial goals by enabling one to set realistic plans to evaluate existing alternatives and assume effective measures.
It is prudent to note that a holistic financial plan does not only incorporate monetary investments and wealth-creation but also tax and credit obligations, daily spending, planning for a family, setting up savings for children. All these are core elements of a financial plan. To this end, financial planners are usually sought to aid individuals that may require specialized advice from the relevant parties. This is because financial planning can be complex and time-consuming. A financial planner has sufficient knowledge, and comprehension of all the elements of financial planning these professionals are aid an individual to achieve financial objectives through planning and its consequent implementation.
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There exist a number of misconceptions that hinder many people from taking the required initiative for financial planning. The first misconception is that one ought to initiate financial planning when approaching retirement age. This is utterly wrong as it is supposed to be a life-long process. The earlier starts taking financial planning seriously, the sooner he or she can enjoy the end benefits. The second misconception is that financial planning is investing (Swan, 2004). This is a wrong perspective as financial planning is holistic as it brings together different elements of personal finance. Lastly, it is assumed that one needs to have a lot of money so as to start financial planning. No matter how much one earns, he or she can always benefit from having a proper plan for his or her finances. Financial planning takes time as it is “comprehensive planning which involves the integration of personal and financial goals.” It incorporates income tax management, risk management, retirement planning, child education planning, estate planning, and investment management (Grable & Goetz, 2017).
The financial planning process highlights the steps that may be undertaken by an individual or a professional financial planner. It is a continuous process and requires consistent monitoring, fine-tuning, and reviewing. It is, therefore, incumbent on an individual or financial planner to adopt these changes in a financial plan to achieve the desired outcome quickly. The first step is the assessment of a financial situation. The financial situation is assessed through a number of strategies. Firstly, one must assess his or her net worth. Net worth can be defined as a common way to look at where and how one stands financially (AICPA, Tillery, & Tillery, 2017). It is arrived at by simply subtracting one’s liabilities from his or her assets. This can be made possible by reviewing financial statements or even using different digital financial assessment platforms and products. An income statement, for instance, provides information on operating profits and losses as well as the earnings. The information collected in such statements is very instrumental. Secondly, one must review his or her spending habits and ability to keep to a budget (Denby Brandon & Welch, 2009). One may also evaluate debt to income ratio to ascertain his or her financial standing. This goes a long way in providing an actual picture of the financial situation.
The next step of financial planning is the creation of a budget. A budget is defined as “a formal statement of estimated income and expenses based on future objectives and plans.” It may also be defined as a tool used in the forecasting of financial position and results of an entity for a future period. A budget can be simple or complex depending on a user’s income streams and expenses. It is prudent to note that there are two major types of budgets, namely, short-term and long-term. The former usually cover a span of one year or less. Therefore, the estimated incomes and expenses are set at the start of the year. The actual numbers are reviewed later in the period to establish whether they actually “met the budget.” Long-term budgets, on the other hand, cover time a year or more. These budgets are usually very general. They mostly focus on large investments as well as broad organizational goals.
Based on a sound understanding of the financial situation, an individual can pinpoint his or her short, medium, and long-term financial goals (Gardner, Gardner, & Motley Fool, 2003). As such one can effectively review the budget and determine the actual time-frame for investment and create a strategy for deciding on the key investments to be made. It is evident that with measurable and well-defined targets, it will be easier for a person to monitor and review any progress. Many financial planners advise that a person must specify what he or she is planning for. A good strategy is through the creation of a list of all needs and goals. However, the goals must be realistic and founded on the comprehension of one’s personal risk tolerance.
After setting financial goals, an individual ought to commit to saving. Putting aside some of one’s earnings is essential for any financial plan. This is because it creates a buffer for any uncertainties in the future. Savings at an early age allows a person to gain from the effect of compounding, a powerful mechanism that puts the time to work on an individual’s savings. The compounding effect is observed in the banking sector, where savings earn compound interest on the principal amount. In cognizance of financial goals, an individual can have different savings plans that meet their needs.
The fifth step in the financial planning process is knowing one’s risk tolerance. It is fundamental to review the magnitude of uncertain events or scenarios that one can withstand. An individual ought to acknowledge that risk is a threat that may have a profound impact on the expected outcome of such a person’s investments. It is prudent to comprehend that many investments that have high returns are usually dotted with higher risks. As such, a given investment portfolio must be matched against an individual’s risk tolerance.
The last financial planning step is the implementation of a financial plan and recommendations. This step appreciates the key tenets of a basic financial plan which are: insurance, future consumption, savings, responsible borrowing, estate planning, and retirement planning (Gardner, Gardner, & Motley Fool, 2003). Implementation requires discipline and continued monitoring which can be individual or through the aid of a third party. It is evident that it is a gradual process which demands that one sets realistic goals while incorporating adjustments where there is reasonable need.
In conclusion, financial planning is important as it goes a long way in ensuring that individuals pursue balanced lives. The series of steps taken by a person towards this endeavor are subjective as each person has a different financial standing and set of objectives. It is important to acknowledge that every individual has varied sets of income, background, risk-taking ability, assets, needs, knowledge, et cetera. All these facts come into play in any financial planning process. The financial planning process is core to any individual, household, and business entity as it projects positive growth in assets, resources, and personal investment.
References
AICPA, Tillery, & Tillery, T. (2017). Personal Financial Planning . Hoboken, NJ: John Wiley & Sons.
E. Denby Brandon, J., & Welch, H. O. (2009). The History of Financial Planning: The Transformation of Financial Services . Hoboken, NJ: John Wiley & Sons.
Gardner, D., Gardner, T., & Motley Fool, I. (2003). The Motley Fool Personal Finance Workbook: A Foolproof Guide to Organizing Your Cash and Building Wealth . New York, NY: Simon & Schuster.
Grable, J. E., & Goetz, J. W. (2017). Communication Essentials for Financial Planners: Strategies and Techniques . Hoboken, NJ: John Wiley & Sons.
Swan, J. (2004). Practical Financial Modelling: A Guide to Current Practice . Amsterdam, Netherlands: Elsevier.
