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Financial planning is the process of setting and creating a strategy to achieve your financial goals. Whether you're planning for short-, medium- or long-term desires, having a financial plan in place makes money decisions easier every step of the way.
It's common to work with a professional when putting together a financial plan, but much of the process is straightforward and possible to do on your own.
The Benefits of Having a Financial Plan
Understanding where you stand with your money and creating a plan for your financial goals is critical to your financial success. While it's possible to achieve some money goals without a financial plan, it's a lot easier when you have a clear path forward. Having a plan in place serves as helpful guidance when questions of how much to spend and how much to save come up.
Here are some of the more significant benefits of personal financial planning:
- You'll better understand your current situation. If you don't budget or keep track of where your money goes, it's hard to know what kind of financial shape you're in. With a financial plan, you'll always have a pulse on your financial health and know what you're capable of doing.
- You'll have a handle on risk management. Having an emergency fund is essential because you never know when you'll need it. What's more, knowing which types of insurance you need—such as health, life and disability—and how much can provide some protection when things go seriously wrong. With a good strategy, you'll be able to plan for these risk management tools and fit them in your budget.
- You can eliminate debt faster. If paying off debt is important to you, part of your financial plan can include specific actions you can take to accomplish that goal as fast as possible.
- You can boost other savings goals. Depending on your goals, you may want to set aside cash for a home down payment, house renovations, a vacation and more. A financial plan can help you map out how you'll meet each of your savings goals, and give you the motivation to do it.
- You'll be ahead on long-term goals. Whether you're saving for retirement, a vacation or a child's college education, financial planning can help you understand exactly how much you need to accomplish your goal and what you need to be doing now to get there. The sooner you start this process, the easier it will be to get ahead.
Finally, financial planning can improve your chances of achieving financial freedom. While that term can mean different things to different people, it generally means having a feeling of security and empowerment with your money.
How to Form a Financial Plan
If you're at a stage of your life where you've accumulated debt, savings and investments, it may be worth the cost to work with a financial advisor when establishing your financial plan. These advisors are not only well-equipped with knowledge about various financial topics, but they can also provide an objective perspective and opinion about your situation.
But if you'd prefer to build your financial plan on your own, follow these tips to get started:
- Acknowledge your goals and priorities. Everyone is different, so it's important to understand what's most important to you and what you want to accomplish with your money. If you have a partner, it's important to recognize that your goals and priorities may differ. Take some time to communicate, so you're both on the same page.
- Get a grasp of your current financial status. Start by writing out your income and expenses to get an idea of where your money is going. Also, take stock of your assets, such as savings and investments, and your debts, so you can calculate your net worth.
- Build a budget and cut expenses. Making a budget is one of the most fundamental things you can do to achieve your financial goals because it helps you take control of how you use your money. Your financial plan may also include a plan to cut expenses so you can gain more cash flow to use for financial goals. Focus first on emergency savings, then on other top priorities after that.
- Make a plan to get out of debt. Debt payments can make it difficult to accumulate savings, investments and other assets. So take some time to work out a plan to pay down your debt, starting with balances that carry higher interest like credit cards, personal loans and student loans.
- Start saving and planning for retirement. While retirement is still decades away for some people, the sooner you start planning for retirement, the easier it will be to achieve your goal. Work with a professional or use an online retirement calculator to get an idea of how much you need to be saving, then do your best to do so with what you have.
After you take these initial steps, you'll be in a better position to work on other aspects of your financial plan, such as education savings, a home down payment and more.
How Does Your Credit Score Affect Financial Planning?
Your credit score is a major component of your financial plan, and establishing and maintaining an excellent credit history is crucial.
The primary reason for this is that your credit score affects how much it costs to borrow money. Whether you're financing a mortgage or a car, or you're applying for a credit card or personal loan, a higher credit score can get you a lower interest rate.
Having great credit can also help you qualify for discounts on auto and homeowners insurance, avoid deposit requirements on utility accounts, or even get into the job or apartment you want.
In other words, having a good credit score is key to achieving your financial goals, both now and in the long run.
Take Advantage of Free Online Resources
Creating a financial plan can be a daunting task, but fortunately, there are online tools and resources that can help you. If you have a question about something, the answer is almost always a quick internet search away.
Also, there are ways to get free access to your credit score, as well as calculators, budgeting tools, general guidance and more. Take some time to research the different resources that are available, and it can help improve your confidence in yourself and your financial plan.