We tend to think of financial planning as something only the wealthy need to think about. But there are many practical reasons for all of us to engage in a basic review of our financial life. It's helpful to develop the direction we want to take, as well as how we will get there.
Financial planning: What it is and why it’s important to have a plan
A financial plan can help you direct how you organize your finances, from the small, short-term questions to the big, long-term issues. Your financial plan can be as big and complex as you want it to be, or as simple and straightforward as you like — so long as it helps you get to where you’re going.
A financial plan can help you get your financial life in order in areas such as:
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Budgets– How much can you spend this week or month and still stay on track?
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Debt reduction– How much do you need to pay down and how can you do it?
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Retirement– How much do you need to save from each paycheck to retire comfortably?
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Investments– How can you save and invest to grow your wealth?
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Taxes– How can you minimize your tax bill and ensure the money is there when you need it?
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Insurance– How can you get the right coverage at the right time?
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Estate planning– How will you distribute your assets to your loved ones?
These are some of the largest issues when it comes to financial planning. And the plan can be as “big picture” or “little picture” as you want to make it. But here’s the point: Your financial plan needs to provide a path for you to meet your financial goals, including helping to motivate you.
Types of financial planning
Financial planning can be broken down into categories depending on the activity.
- Budgeting: Budgeting revolves around the daily choices that impact your finances. A budgeting plan can help you understand where your money is going and how you can adjust to meet your goals. Good budgeting is the “blocking and tackling” of good financial habits, and you can really only build wealth when your spending remains below your income.
- Debt reduction: If you’ve piled on too much debt, a financial plan can help you devise a way to get out from under debt. That may involve living below your means or refinancing your debt. Whichever way you go, this kind of plan helps you get out of the habits that led to debt.
- Retirement planning: This kind of financial plan can help you create the roadmap to a comfortable retirement, showing how much you need to invest each month and year to achieve your goals. It can also help you pick the right investments to meet your goals and help you adjust those investments over time.
- Wealth management: A wealth management plan can help you build wealth and grow the wealth that you already have. Your plan may cover tax-advantaged ways to build wealth, how to minimize taxes and the best options to grow your net assets. This kind of plan may involve investment management, tax planning and estate planning.
- Tax planning: Taxes can be daunting even when they’re relatively easy, and good tax planning helps minimize your tax liability to ensure you have money when you need it to pay the bills. Good tax planning can create ways to minimize the long-term impact of taxes on your finances, too.
- Insurance planning: Insurance planning can help you get the right insurance for the right stage of life, allowing you to maximize its benefits while minimizing its costs. A good plan can help protect you, at least financially, from some of the twists of fate and help you stay on your feet.
- Estate planning: Estate planning is the process of optimizing your estate when you pass, ensuring that you’re minimizing taxes and that your loved ones receive what you intended. Good estate planning helps minimize costs and speeds your estate through the legal system and reduces family strife.
For a step-by-step guide on how to approach each aspect of creating a financial plan, read the full article here.
Before you can look to the future, it is important to review your current financial status. It may be time to freshen your finances! For example, are your current bank accounts meeting your needs? Are you getting the most out of your credit cards? Contact First Federal Bank today, and we can help you make sure your financial house is in order!