It’s hard to reach your financial goals by accident. The vast majority of people do a fair amount of planning and strategizing to build their wealth and achieve those goals. That’s what financial planning is for. Your financial plan serves as the bridge between now and your financial future. This article will explain what financial planning is and why it can be essential to your success.
What is financial planning?
Financial planning involves setting short-term and long-term goals, then looking over your entire financial picture to create a strategy to achieve those goals. You can create a financial plan yourself, but many people seek help from financial advisors.
Why is financial planning important?
Here are a few reasons why financial planning is critical to managing your money:
1. Can help you accomplish financial goals
The main reason people engage in financial planning is to set and work toward financial goals. A good financial plan will help you define and save for goals such as:
- Buying a home or car
- Creating an emergency fund
- Paying off debt
- Saving for your child’s college
Your plan will have amounts for these goals and lay out the steps needed to reach those amounts, including how much you must save each month.
2. Can help you select investments
Everyone has different investment goals, timelines, and risk tolerances, depending on their age and the time until their financial goals. So, once you know your goals and your timeline, you can choose the right mix of investments to get there.
For example, if you’re young and saving for retirement, you might have a higher risk tolerance and could consider more aggressive investments. You won’t need them for several decades, so you might be able to stomach larger market fluctuations.
On the other hand, perhaps you want to buy a house in 5 years. You might put your savings in a savings account, a Certificate of Deposit, or other more conservative investments. This will protect your savings against fluctuations when you need it while helping you earn some money.
3. Can help you live within your means
Financial plans help keep you accountable for a few reasons. First, they often include a budget. Budgets let you set specific amounts for spending categories, helping you to avoid overspending. Plus, they can help you find and cut unnecessary expenses, like unused subscription services.
The goals and rewards for reaching them also hold you accountable. You can’t overspend, or you may fall behind on your goals. As a result, you’ll live within your means to meet your monthly savings amounts each month.
4. Can help you plan for taxes
Financial planning can help you plan for tax season and save more money on taxes — meaning more money for financial goals. For example, you can determine which accounts to contribute to based on your tax goals. If you earn a lot now, you might put more into pre-tax retirement accounts like a 401(k) or a traditional IRA. On the other hand, perhaps you think your retirement living expenses will be higher. In that case, you can save in a Roth IRA, which offers tax-free distributions in retirement.
Plan for your financial future
Creating a bright and secure financial future starts with building a detailed financial plan. Financial planning can help you accomplish financial goals, reign in spending to live within your means, and avoid debt. Plus, it helps you choose investments and plan for taxes.
With all this in mind, set aside time to work on your financial plan as soon as possible. Consider working with a financial advisor, too — they can help you lay out your situation and answer any questions or concerns you may have. And if you need extra funds in the meantime, consider a payday loan with instant approval and same-day cash.