As you get swept away by the hustle of daily life, it is tempting to assume your monthly income adequately covers all your expenses. However, the reality is that unexpected costs may disrupt finances and compromise your financial stability. This is why financial planning is an important skill that should be learned by individuals of all income levels and backgrounds, according to Forbes.
Strategic financial planning and management is just like shopping in a centre with a wide selection of products: the more exposure you have, the lesser the chances of you falling prey to buying products you do not really need.
When you are a wise financial planner, you channel your knowledge of the industry along with your financial status in order to avail only those services aligned with your best interests.
In this article, you will learn the basics of financial planning, differentiate the elements of a finance plan, understand how to set financial goals, and follow a step-by-step guide to improve your wealth management.
What is Financial Planning?
Financial planning and analysis (FP&A) is the process of assessing your overall financial health, as noted by an investing application, Stash. It evaluates your income, expenses, assets, and liabilities to determine what you can afford and what you need to prioritise.
Sometimes referred to as financial assessment, your goal is to arrive at strategies that will enable you to hit your short and long-term goals.
For example, if you want to buy a house in five years, you first identify how much income you should make in a year. Next, you prioritise expenses, only from there you plan how much money needs to go to your savings for you to hit your goal.
Or perhaps you have other objectives, like buying a car the next month, scaling your business, or even retiring early. Whatever your goal may be, finance planning will guide you in reducing unnecessary expenses.
Despite its significance, many individuals know very little about financial planning, thinking that it is only for high net-worth individuals or investors. But as Ariel Investment President and Co-CEO Mellody Hobson says, financial literacy is not just about having a lot of money–it is understanding how money works so you can use it to your advantage.
In fact, Mellody has been championing financial literacy in children as early as kindergarten, believing it is an essential skill for them.
Components of a Financial Plan
There are different components that make up an effective financial plan. This section will explore these components to help you develop a comprehensive strategy.
Financial Goals
These are the primary objectives that guide how you save and spend money, according to financial services company Schwab.
Below are some of the goals you can consider:
- Short-term: Financial goals achieved in 1-3 years (pay off debt, build emergency fund, increase income)
- Medium-term: Financial goals achieved in 3-5 years (starting a small business, buy a car, home renovation)
- Long-term: Financial goals achieved in 10+ years (invest in real estate, retirement planning, children’s education fund).
Net Worth
Net Worth is the value of the assets you own minus the liabilities you owe, according to Investopedia. When your assets exceed your liabilities, your net worth is positive.
On the other hand, a negative net worth shows that your liabilities outweigh your assets. Before you can craft an effective financial plan, you first need to know your financial well-being. Is it in a healthy state, or are you struggling to pay off debts?
To calculate your net worth, you can utilise various cash management software which enables you to create an inventory of all your assets and liabilities. Having all this information in one platform makes it easier to monitor changes in your net worth and adjust your spending as needed.
Personal Income and Expenses
Personal income is the amount of money you earn in forms like wages and salaries. On the other hand, expenses are the money spent on bills, groceries, transportation, and the like.
Within financial planning, balancing income and expenses ensures you have enough money to meet your needs in case of emergencies.
Budget Plan
A budget plan involves allocating money and identifying available cash for required spending. Your budget determines where your money goes and where to cut costs in line with the financial goals you have set.
Let’s say you have a monthly income of £2,886. Your budget plan will then include fixed expenses like rent (£895) and utilities (£159), plus other needs such as groceries (£255), gas and transportation (£104), or personal care (£58). That will then leave you with £1,415 for savings or to pay debts.
Debt Management
Debt management refers to organising and managing what you owe, as defined by a financial education organisation, Finance Strategists. During debt assessment, you analyse factors like interest rates, tenor or terms, plus other agreed upon conditions. You then plan which debts to pay off first, or decide to consolidate some.
For example, you can prioritise high-interest debts or try to negotiate more favourable terms with your creditors to expedite the process of becoming debt-free.
5 Steps in Planning Your Finances
Planning your finances is key to achieving your financial goals and building long-term stability. In this section, you will learn five practical steps to create a financial plan.
Step 1: Define Your Current Financial Situation
Tarver and Dammeyer of Forbes Advisor suggest starting by listing your income sources, savings, living expenses, and debts. You can use a spreadsheet to sum up the amounts under each category. Alternatively, there are several finance management tools available that can calculate these figures for you.
Step 2: Establish Financial Goals
Clearly define what you want to achieve financially. Make each goal specific, measurable, and time-bound—whether it’s saving for a down payment, paying off debt, or building an emergency fund.
For example, do you want to save for a vacation? If yes, how much is your target and when do you plan to leave? Or maybe you want to buy a home? If so, which type of home and where is the property located?
Without a measurable target, you will keep missing your financial goal. You can rephrase your goal above to say “I will save £1,500 over six months for a trip to Bali, Indonesia.”
Step 3: Explore Other Courses of Action
Finance planning involves thinking about alternative outcomes and planning for contingencies.
For example, if you noticed that more than 50% of your monthly income goes to restaurant dining fees, you can explore cost-effective alternatives such as cooking at home, buying food from the market, or limiting the number of times you splurge on food.
There is no one-size-fits-all in finance planning, but the best financial plan for you will always be the one that aligns best with your goal.
Step 4: Create and Implement a Financial Plan
Now that you understand your current financial health, what your goals are, and alternative ways to help you reduce spending, it is time to craft your plan.
At this stage, you need to answer one question: given your current financial status, what are the specific steps you will follow to make sure you achieve the goal you listed?
Say, your goal is to save £53,000 within 12 months as down payment for a house. Your plan will then include how much monthly savings to target, and which short-term investment strategies you can use to grow portions of your money before your goal deadline. The plan will also outline specific actions to avoid spending too much on wants versus needs.
Leveraging tools like an asset tracking software can streamline the consolidation of information needed to optimise your financial plan. These tools can capture changes in your asset values, expenses, and overall financial health.
Step 5: Review and Revise the Plan
Financial planning is a process that requires regular evaluation. It does not stop when you fail to achieve your targets. Instead, you ask yourself what led to your failure and identify actions to prevent this from happening again.
As you revisit your progress and adjust your strategies from time to time, you will get closer to your financial goals.
Say, you have initially set a goal to save for a home down payment within five years. During the second quarter, you noticed an increase in medical expenses that caused you to miss your savings target.
In response, you revise your plan by extending the timeline for the home purchase goal, adjusting the monthly savings target, or exploring additional ways to increase income.
Are You Hitting Your Financial Goals?
While everyone should have a detailed personal finance roadmap, reaching your goals does not end once the plan is finalised. Having a structured finance planning document sets you on the right course, but you will need to drive forward, make left or right turns as you encounter obstacles on the road, or sometimes go through roundabouts just to reach your final destination.
As a strategic finance planner, you need to develop a lot of patience, be honest about the real state of your finances, and utilise investment opportunities whenever possible to move you closer to the finish line.
Strategic financial planning is not just for high income individuals. It is a skill that every individual needs to master.
Personal Finance Management: Frequently Asked Questions
1. What are the basic elements of financial planning?
Finance management and planning includes assessing your financial situation, setting goals, creating a plan, and funding goals through savings or investments.
2. What is the main purpose of financial planning?
A financial plan is your personalised roadmap to managing finances so you can drive towards your goals. It outlines your specific strategies about budgeting, saving, investing, or debt management based on the reality of your financial situation.
3. How do you achieve your financial goals?
Hitting your wealth targets or specific goals means creating a detailed financial plan, regularly reviewing it, and making necessary adjustments until such a time that the goal is met. You will need consistent saving, disciplined spending, and strategic investment to progress towards your goals.
Monitor Your Finances with MyAssets
You cannot start building your finance plan without a sound knowledge of where you are financially.
With an asset management tool like MyAssets, you can easily compile all your financial activities, assets, and liabilities in one spot to guide you in setting your finance strategies.
MyAssets supports you as you manage your investment portfolio. Its reporting feature gives you insights on your assets’ net worth, current expenses, and overall financial health.
With a user-friendly interface that allows you to easily track your investments, you can evaluate the performance of your assets to easily adjust your crafted financial plan.
The platform can be explored in detail at app.myassets.com.
