Financial planning could mean a lot of things for a lot of different people. One thing is certain – it is important to have a clear-cut definition of what wealth is in order to set plans and goals accordingly.
What makes this a little tricky is the fact that wealth would be viewed differently by a lot of people. For some, it can be a number of investments they have built up over the years or even how much their house is worth. It can even be as simple as the amount of money they have in their accounts. For some of the more sentimental people – their wealth consists of family and relationships they have fostered over the years.
With all these differences, you would agree that wealth is an important factor when you talk about financial planning. After all, this is the plan that will help you reach your dreams. This dream can vary from stepping up the corporate ladder, opening your own business, buying that dream house or saving enough to be able to retire early.
According to TheRedPin.com, the words of James Adams in 1931 encapsulates what the American dream is for most people. It talks about being in a position to have a richer and fuller life and having an equal chance for an opportunity based on achievement and ability. This paints a very beautiful picture for people which is actually one of the foundations the country was built upon.
What you need to understand is that for every dream that you have, financial planning and your definition of wealth will always be an integral part of it. If your dream is to have a nice house, manicured lawns and enough financial elbow room for a night out or a nice meal once a month, this will only be possible depending on how you go about your financial plans.
What does being wealthy mean to you?
But before you fully engage in creating your financial plans, it is important to define wealth first – more specifically, what being wealthy means to you. BusinessInsider.com shares that this should precede any financial plans that you have in mind. This is just like when you decide to take on a healthy lifestyle – you need to have a clear definition of what healthy means to you because this will lay the foundation of your succeeding actions. It is like defining the goals that you will reach.
If being healthy means eating right then you prioritize nutrition and watching what you eat. If it means packing on the muscles then going to the gym or picking up an athletic hobby should be your next steps. The same goes with financial planning, you need to have a clear understanding what wealth means to you so you can lay out your next move.
What are the examples of wealth for Americans?
According to the 2013 article published in Time.com, being wealthy is more than the amount of money that you have – or even your net worth. The article discussed a survey conducted by UBS and it revealed that those with investable assets of $1 million to $5 million, only 28% said they consider themselves wealthy. 4 out of 10 Americans with $5 million or more do not believe they are rich.
Apparently, these people perceive being wealthy as something that has to do with what they do – rather than a specific net worth. It is more of the freedom from financial constraints that will make them feel like they are rich.
Coming from people who are worth millions, this is an eye opener indeed. Think about this as you define your own personal definition of what being wealthy really is.
Tips to help you create an effective financial plan
Now that you kHere are few things you can look into to help you in planning your finances as you move forward in your financial journey.
Figure out how you spend money. On top of your head, you would have a hard time laying out how you are spending on a day to day basis. This is a good start and can even help you understand how you are spending your money. One way to go about this is to carry around pen and paper so you can list down all your expenses. You can also use any application so you can electronically store this information. Your priority in this exercise is to be able to categorize your expenses and not looking where to make budget cuts.
Have a specific goal to aspire for. Another important component in financial planning is to have a concrete financial goal you are reaching for. One common pitfall most people commit at this stage is that they tend to have a general idea of their goals. What you need to have are firm and detailed ones to give you more drive in life. Rather than saying you want to have a comfortable and early retirement, it is better to have a specific age when you want to retire and how much you want to have in your fund. You can set other goals like saving up for a vacation, setting up a college fund for your kids or making an expensive purchase.
Build an emergency fund. Having an emergency fund is also one of the tasks that you need to do during financial planning. This is the best way to keep your finances secure. It will also keep you out of debt. When something happens that requires funding that your budget cannot cover, you will be forced to use debt to pay for it. Do not let this happen by building an emergency fund beforehand. This will be the money that you will use to pay for unexpected expenses.
Start saving. This is a proactive way of building your wealth. Your financial plan will not be complete without savings. In fact, this is usually the purpose of your financial plans – to help you save money. You will plan how you will use your money so it can help you build your net worth.
Invest your savings. Of course, when you have saved enough money, it is important that you invest it. Do not let it stay in the bank doing nothing. It can earn you money through investing. You can use stocks, bonds or mutual funds – depending on your choice. Just make sure that you will choose the type of investment that will help you reach your financial goals.
Practice credit management. Finally, you need to learn how to use credit properly. If you have existing debts, you need to pay it off. If none, then you need to continue using it. Being financially successful does not mean you will not use credit. You need to use it to maintain a good credit score. Credit management is the best way to use credit without being in danger of acquiring too much debt. There are many ways that you can use debt to your advantage.
Financial planning will help you accomplish all of these and so much more. It will not really make the task easy to accomplish, but it will allow you to put your finances in order so your chances of succeeding will be higher.
Here is a video that gives tips on how you can build wealth. Apparently, moving too much can also affect your ability to build wealth.
Common questions about financial planning
Question: When should you start financial planning?
Answer: You need to start as soon as possible. Ideally, you should start after getting your first paycheck. This will ensure that you will know what to do with the succeeding paychecks that you will receive. Some people start even when they are still in school. As soon as you realize what you want to happen in the future, you should consider planning your finances.
Question: Who benefits from financial planning?
Answer: You are the primary beneficiary of financial planning. It will ensure that you will have a great future ahead. Anyone who lives with you or those you have taken under your care will also benefit from this.
Question: How important is financial planning?
Answer: Any plan is important because it helps give your life direction and keeps you from making mistakes. In the case of errors, you do not have to worry because your financial plan will help you recover.
Question: How to start financial planning?
Answer: Financial planning is all about your past, present, and future. You need to analyze your past so you will know the successes you need to replicate and the mistakes you need to avoid. Your future will allow you to define what you want to happen and the goals that you will set. Your present will help you determine the resources that will help you make the future a certainty.
Question: What does financial planning include?
Answer: This depends on your goals. If you want to build a sizable retirement money, you need to focus on a retirement plan. If you want to buy your own house, you need to boost your savings for a down payment and use credit wisely so you can benefit from a low-interest mortgage. In case you wish to create a passive income, you have to concentrate on investments.