As a family or couple, one of the most important parts of managing your finances is financial planning.
In this article, I am going to take you through the various components of financial planning.
The following are the major elements or components of financial planning:
1. Make financial goals
2. Understand your net worth or financial situation
3. Making a budget and cash flow management plan
4. Insurance planning
5. Debt management planning
6. Emergency fund planning
7. Retirement planning
Why Financial Planning is Important?
Before I move forward to explain the various components of financial planning identified above, I would like to quickly draw your attention to the importance of engaging in financial planning.
Let’s look at them as follows:
1. Improves Your Savings
If you have been struggling to save for the future, try to engage in financial planning.
How would that help me improve my savings, you may ask? During the process of planning your finances, you identify your financial goals, plan for those at the top of your list, and remove unnecessary ones.
Due to the above, you are able to assign money for savings. Without that, you are likely to spend unreasonably, thereby struggling to put something aside for your family’s future.
2. Better Management of Family Finances
Financial planning is a great tool that can help you manage your family’s income effectively.
By identifying the financial needs of your family for the period in consideration, you are better able to understand how to budget well.
Throughout the budget process, you match your income to expenses, which helps you spend reasonably.
This is because you better track your cashflows and various expenses thereby making your financial situation clearer to you.
Having a clearer picture of your financial situation, goals, and expenses helps you manage your income and finances.
3. Happy Family
Embarking on financial planning helps improve bonds and relationships within your family.
This is because financial planning can help you meet everyone’s needs reasonably. This makes everyone happy.
Even though you will not be able to meet every need of family members, everyone will understand and cooperate to help achieve their goals one day.
4. Planning for Retirement
One of the goals of planning for your finances is to help you prepare for retirement.
A properly planned finance gives you space to set aside some cash every month to cater for yourselves when you retire.
That’s critical for everyone, and you must be motivated to engage in financial planning for your family.
5. Investment management
Financial Planning helps you spend and leave some of your income for investment. The investment will help earn you and your family more cash.
Remember, misuse your money, and it shall misuse you—if not tomorrow, then in the future. This means investing some of your income will produce more money for you in the future.
That’s better than spending randomly and on unnecessary events, activities, and instant gratification.
In light of this, I recommend you undertake financial planning.
What Are the Components of Financial Planning?
Now, how do you engage in financial planning? What are the components of financial planning?
In this section, we will look at the components of the financial planning process. Let’s start:
1. Financial Goals
Financial planning starts with the identification of the financial goals and needs of the family.
Try to identify the needs of everyone that require spending money in the process of meeting them.
Well-identified financial goals of a family include:
a. Short-term goals: These are financial goals that consist of meeting your immediate needs. Short-term needs capture the financial needs of today, a week, a month, and even a year. Examples of short-term financial goals are taking a vacation, meeting monthly expenses, etc. Remember, short-term financial goals take under a year to be achieved.
b. Medium-term goals: These goals take between a year to five years to achieve. Examples of medium-term financial goals are purchasing a car, earning a degree certificate, paying credit card debt, etc.
c. Long-term goals: These goals take several years to be achieved, mostly more than five years. They are often heavier (demand more money) and require a strong commitment. Examples are purchasing a home, retirement savings, savings for children’s education, etc.
I hope this helps you a lot in identifying the most important financial goals you must plan to achieve. Remember, your financial goals must be SMART. This means they must be Specific, Measurable, Attainable, Realistic, and Time-based. That is critical to smoothing the implementation process for you.
2. Knowing Your Net Worth
After identifying the financial goals for the family, it is necessary to know the financial situation of your family. How much are you worth?
Understanding that is critical in moving forward in the process of financial planning. This allows you to match your income to the various financial goals you have for your family.
It also helps you live within or below your means. In determining your net worth, list all your assets and compare them to your liabilities.
Your assets could include your physical cash in bank accounts, personal properties, investments, real estate, etc.
Your liabilities would be your credit card debts, other debts, mortgages, student loans, etc.
When you subtract all your liabilities from your assets, the result is your net worth. Note that it can be positive or negative. Don’t worry if it is negative. Just work hard to improve it. You can do it.
3. Making Budget
Now that you have already understood your financial situation after conducting the net worth analysis, it is time to create a budget.
The budget is a tool to help you track where your income or money goes in an attempt to meet your financial goals. That is, you allocate your spendable income to various expenses that you need to meet.
In essence, it helps you control the spending of the family. It also, helps you save money by helping you cut down on unnecessary spending thereby leaving money back on the table for you to save.
Because of this, budgeting is an important element of financial planning that everyone must do when trying to manage their finances.
4. Insurance Planning
This is another critical component of financial planning. This is because no one knows the future. Due to that, it is crucial to plan for future eventualities in your financial planning.
It, therefore, helps protect you and your family against those unfavorable future events.
With insurance, the financial burden on you in times of unexpected events such as disasters will be released.
So, try to understand and analyze your family’s risk factors to select insurance coverage that will help you have peace in case a disaster strikes you.
Examples of insurance coverages that can help you are health, car, fire, life, and many more.
5. Debt Management Planning
From time to time, you may accumulate debts. These debts are supposed to be paid. Some of these debts are student loans, credit card debts, debts from friends, and many others.
You must therefore make a space in your plan for the management of your debts. It helps you to plan to repay your debts.
6. Emergency fund planning
Every good financial plan must include an emergency plan. Here, a plan of how you will cope financially with unforeseen events is made.
There are instances where certain eventualities occur that we cannot insure ourselves against. The burden of those eventualities can be mitigated with an emergency fund.
For example, if a person loses his/her job, he can rely on the emergency funds accumulated over the years he was working while looking for a new one.
This is why it is an important component of financial planning. Having that always helps protect you and your family against the unexpected events that sometimes occur in our lives.
7. Retirement planning
Retirement is an important part of one’s life. Because of that, it is crucial to prepare for it. Therefore, your financial plan must include a component for retirement.
Remember, retirement benefits can only cater to some parts of your life and not everything. Because of that, you will still need extra bucks to help you live comfortably.
It is, therefore, better to save some parts of your income now in order to live comfortably when you are retired.
Final Thoughts
It is important to plan your finances to meet the needs of your family. If you are going to embark on your planning, take note of the components identified in this article. Thank you for staying around.