7 Key Components of Financial Planning
Financial planning is one of the crucial steps you need to attain financial freedom. Whether you want to invest or settle your personal debts, a financial plan can help you reach your financial goals. You can also grow your business, pay bills on time, and generate more streams of income.
A well-designed financial plan evolves as you grow and age. It is flexible to meet your growing needs, assess your income, and balance out possible risks. What's more, you can develop a good plan by yourself to suit your goals. Or better yet, seek the services of a financial planner.
This post will explain seven key components you will need to create a good financial plan.
What Is Financial Planning?
Financial planning is a process of designing effective strategies to achieve financial goals. It is a lifetime plan that every individual needs. This is because it guides your expenses, investments, and income at every life stage. A financial planner can assess your financial state, income, and objectives to help you meet your goals.
Why Is Financial Planning Important?
We all need a working strategy to manage income and accumulate wealth with time. This is where financial planning comes in. A financial plan is crucial for the growth and survival of a business and personal finances.
With a good plan, you can diversify and manage your income effectively. You also achieve stability when you balance the inflow and outflow of money. This improves cash flow and creates investment opportunities.
Proper financial planning tends to improve returns on investments. It allows you to diversify your portfolio and manage risks. It can also protect you when uncertainties caused by market changes occur.
You may need to hire a financial planner to enjoy financial planning. Not only will you get professional guidance, but also a tailored financial plan to suit your needs.
Benefits of Financial Planning Services
Hiring good financial planning services gives you a higher advantage over self-planning. They help you design an effective financial plan that you can stick to and get outstanding results.
Plus, you get value for money as your funds can benefit from good planning. You can also get access to professional advice from human consultants, which is often beneficial.
Everyone experiences financial planning roadblocks like insufficient funds, time, or skill. Creating a plan may also seem complicated and daunting. But with a financial planner, you can overcome these roadblocks and achieve your financial goals.
Types of Financial Planning
1. Family Financial Planning
This type of financial planning focuses only on family goals, needs, and strategies. Family planning includes budgeting, insurance, estate, retirement, and emergency funds.
A family with kids may include college planning and a trust fund to cater to children's future expenses. A financial advisor is important to guide a family on saving, investing, and paying off debt.
2. Business Financial Planning
A financial plan is crucial to creating and managing a business with ease. Business financial planning aims to meet business needs and goals with well-designed strategies. It relies on investments and risk mitigation to grow funds and keep the business afloat.
Proper budget allocation and cash flow management are essential in a business financial plan. Hiring a skilled financial planner will benefit the business in the long run.
3. Personal Financial Planning
This is a comprehensive plan of an individual's financial goals, income, and strategies. A personal financial plan evolves as the individual goes through different life stages. It usually contains all the key components of a financial plan to meet the individual's changing needs. A good personal financial plan can help an individual attain financial freedom.
A retirement plan fits effective strategies for your long-term goals. It helps you prepare for your life stage when you begin your less active days. With a retirement plan, you will likely enjoy your retirement days much better. This is because you will become financially independent and accumulate wealth over the years.
Key Components of the Financial Planning Process
These key components help you detect crucial areas to remember when creating your plan. This allows you to meet your financial needs in the long term adequately.
1. Financial Goals
Setting financial goals is an essential step in financial planning. It defines a target you wish to reach within a given period. Short-term goals are those you aim to achieve within five years. While medium- and long-term goals are those goals you set for from five to ten years or more.
No matter the goal's length of time, it should be specific, realistic, and feasible. Whether you use financial tools or an advisor, ensure to weigh your goals by the level of priorities.
2. Cash Flow Assessment and Budget Outline
Managing the inflow and outflow of funds is a key component worth considering. This is because proper cash flow and budget planning can direct funds to meet the right needs. Again, stick to priorities when setting budgets to fit your goals.
3. Debt Management Planning
Proper debt management helps you to eliminate or avoid high-interest debts that can reduce your funds. Insight on good debt management like mortgages can help build equity with time. You can use leverage as a loan to invest or start a business. This helps you take advantage of investment opportunities and build wealth.
You can put your money into profitable and reliable investment vehicles with a good investment plan. This way, you can grow your savings and manage tax effectively. A financial planner can guide you on how best to diversify your portfolio strategically and manage risks while also helping you properly strategize your relationship between taxes and your investment strategy
5. Estate Planning
In estate planning, you create your will and specify beneficiaries of your wealth. A critical step in developing an estate plan is to generate a net worth statement. This way, you know your assets and liabilities. A financial planner and attorney are important to guide you in choosing a successor in your will.
6. Emergency funds
Unexpected circumstances can happen anytime, and you'd need funds to fall back on. This is where an emergency fund comes in. It prevents you from spending your investment or long-term savings when dire situations arise.
Usually, it is best to save enough funds to cover five months of expenses. An emergency fund should be set up in a liquid savings or checking account for easy access.
7. Insurance Plan
Since risks might occur at any time, having insurance coverage is an excellent way to manage potential losses. It is, however, important to know the essential insurance policies to buy. So you don't pay for coverage you may not need. Health and disability insurance are necessary to cover medical expenses and other bills if you can not work.
Factors To Consider Before Hiring a Financial Planner:
- Choose an experienced planner/company that hopefully can meet your financial needs.
- Ensure you know any potential conflicts of interest by confirming how the planner/company are compensated.
- Confirm if the planner/company operates by either a fiduciary or suitability standard. If they work in your best interest, they work by a fiduciary standard. While in a suitability standard, the planner/company is not legally obligated to put your interests first.
- Do not forget to check for qualifications and experience.
- Do background research on both the planner & the company.
- Ensure that they give transparent fees and clear performance feedback.
- Review the planner & company's products and services to know if they fit your objectives.
Financial planning is the process of developing strategies to meet financial goals. It is crucial to help you manage your cash flow, increase savings, and make good investments. This way, you can achieve financial freedom and grow your business.
Seven key components make up a good financial plan. They include budgeting, debt management, insurance, investment, emergency funds, and estate planning. When looking for a qualified financial planning company, choose one with fiduciary standards. Also, confirm if they are affiliated with a third-party custodian to assure you of their reliability.
Contact a Diddel & Diddel Financial Advisor Today!