In this article we will discuss why financial planning is important, and what it is, in its specific steps in the financial planning process.
Importance of financial planning
Financial Planning is important because it helps us map out our financial future. Through the planning process we can identify where we're currently standing, and once we understand that, we can set some goals to get where we want to go. Simply put, financial planning is looking at where we are, and then looking at where we want to go. Once we've done this, it's easy to make the plans to accomplish our financial goals.
Evaluate current financial situation.
Set financial goals.
Monitor the plan.
Steps of the financial planning process
The first step in the financial planning process is evaluating our current financial situation. We then look at where we want to go financially. Once we have gone through these steps, we then look at taking action to accomplish the goals that we've laid out. We then need to monitor our progress and our goals, from time to time, we need to re-evaluate these goals to make sure that they still fit with our current life and circumstances. Life changes from time to time and it's just about fine to adjust our goals and priorities as those changes occur.
- Evaluate current financial situation
The first step of the process is the evaluation of our current situation. This means looking at all areas of our financial life. We need to look at our protection or insurance. These are things such as how much life insurance we have, and whether we're covered if we get hurt and can't work. We also need to look at our long term and short term goals. Long term goals are things that we are saving for on a regular basis to use in the future. Two major long term goals are paying for future education and funding our retirement. Short term goals are things like our savings which may include evaluating our emergency fund or saving for a home. We need to evaluate if we've done all of our documents. In other words, have we done a will, or a health care directive? Etc.
- Setting financial goals
Setting some financial goals is the next step with the process. We need to spend some time thinking about where we want to go financially. For instance, we need to figure out when we want to retire and how much money we will need to live the lifestyle that we want. Even though no one wants to think about passing away, we need to be prepared with a plan of action for when it happens. We want to pay for some, or all of our kids’ college. These answers are different for everyone, so we need to spend some time figuring out what is right for us.
- Taking action
Once we have identified where we want to go, we need to take action to start working toward these goals. We basically need to fill the gap between what we're currently doing, and what we want to do. For example, we may need to purchase some life insurance to protect our family if something were to happen. We may need to set aside an extra amount of money each month to help meet our retirement goals, or we may need to drop a will to make our wishes known.
- Monitor the plan
Once we have set up these actions into motion, we need to monitor our plan. This begins by tracking what we're currently doing, are we meeting our current goals? Every so often we need to re-evaluate those goals. Over time, life changes and with these changes, we need to make sure that we are still moving in the right direction, we may find that we need to readjust some of those financial goals. We then may begin tracking our process again towards those new goals.
In summary, we discussed that financial planning is a process. We need to evaluate our current financial situation, set some financial goals and take action to begin meeting these goals, and then constantly monitor our progress toward our specific financial goals.
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