For most people, planning for a successful financial future can be
a daunting task that requires the services of a personal finance expert to
implement. But taken step by step, this is one process that may not require
outside help if your know your way around.
But what is financial planning, and why is it so important in the successful
management of your personal finances?
Simply put, financial planning is a 'dynamic process that requires monitoring and
re-evaluation' in all areas of your personal finances. like, for example, savings
accounts, credit cards, loans, stock market investments, retirement annuities,
income tax, life insurance, and funeral plans.
If you ask a financial planner, your broker, or financial adviser
why financial planning is so important in your personal financial
management, there's a 99 percent chance that he/she will tell you
that financial planning is the gold key component of personal finance...
Because, without a financial plan on hand, it is almost impossible
to achieve meaningful goals in your life.
So what's next?
Generally speaking, financial planning consists of a series of five
important steps for managing your finances successfully:
ASSESSMENT
The first thing that you need to do is to assess your current
financial position, or financial fitness, so to speak. This step
requires you to compile things like a simple balance sheet and an
income statement.
A balance sheet shows a list of assets (everything that you
own: house, cars, stocks, investments, and banking accounts,
including clothes) versus liabilities (what you owe others: home,
car and personal loans, debts on your credit cards, etc)
In accounting language, a balance sheet represents your net worth or
true worth, so to speak.
An income statement shows a list of your personal earnings
versus expenses. For example, salary, commissions, royalties, etc.
SETTING GOALS.
To set a goal simply means to determine what exactly it is that
you want to achieve in the (1)short-term, (2)medium-term or (3)long-term.
For example, (1) pay off all outstanding personal loan balances in
twelve months), (2) go on a trip to Russia in 2014) (3) build a
house by the sea coast when I retire at 60 years of age in fifteen
years' time).
CREATING A PLAN.
With every goal you set for yourself, you have to have a plan.
Without a plan of how you're going to achieve those goals is
like hiking in a foreign country without a map or guide to help
you find your way.
ACTING ON YOUR PLAN.
Even if you have the best laid out plans on the planet, your
goals are still just a dream. Nothing More. So setting your plans
in motion means that you do something that leads you one or two
step further towards reaching your goals.
However, taking action to put a financial plan in motion is not
an easy matter. Ask anyone you know! A financial plan requires
much more than saying you'll do such and such so you can become
the next Bill Gates. A financial plan needs discipline like,for
example, and diligence.
Because most people know they have a poor record where discipline
and diligence are involved, they simply hire a professional like a
financial planner or accountant, for example, to help them with
their financial planning in exchange for a fee.
MONITORING AND RE-EVALUATING.
We all know that things change. People change. Dreams change.
Even the best laid out plans change over time.
For example, when I got married some ten years ago I had to
change my financial goals to include my new spouse. A year after
we got married, the birth of our first child changed the whole
complexion in our financial planning.
So it is always important to monitor and re-evaluate your plans
as time passes. That way you know everything is still moving
forward the way you planned it.
LET'S RECAP...
Financial planning is a key component of personal finance.
Personal finance, on the other hand, includes managing bank
accounts, retirement annuities, investments in stock. and life insurance.
Financial planning consists of a series of five steps:
1.Assessment,
2. Setting goals,
3. Creating a plan,
4. Acting on your plan, and
5. Monitoring and re-evaluating.
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