Basics Of Financial Planning
Financial Planning is the process of meeting your life goals through the proper management of your finances. Life goals can include buying a house, saving for your child’s higher education or planning for retirement.
The financial planning process is a logical, six-step procedure:
Step 1: Determine Your Current Financial Situation
In this first step of the financial planning process, you will determine your current financial situation with regard to income, savings, living expenses, and debts. Preparing a list of current asset and debt balances and amounts spent for various items gives you a foundation for financial planning activities.
Step 2: Develop Financial Goals
- You should periodically analyze your financial values and goals. This involves identifying how you feel about money and why you feel that way. The purpose of this analysis is to differentiate your needs from your wants.
- Specific financial goals are vital to financial planning. Others can suggest financial goals for you; however, you must decide which goals to pursue. Your financial goals can range from spending all of your current income to developing an extensive savings and investment program for your future financial security.
Step 3: Identify Alternative Courses of Action
- Developing alternatives is crucial for making good decisions. Although many factors will influence the available alternatives, possible courses of action usually fall into these categories:
- Continue the same course of action.
- Expand the current situation.
- Change the current situation.
- Take a new course of action.
- Not all of these categories will apply to every decision situation; however, they do represent possible courses of action.
- Creativity in decision making is vital to effective choices. Considering all of the possible alternatives will help you make more effective and satisfying decisions.
Step 4: Evaluate Alternatives
- You need to evaluate possible courses of action, taking into consideration your life situation, personal values, and current economic conditions.
- Consequences of Choices. Every decision closes off alternatives. For example, a decision to invest in stock may mean you cannot take a vacation. A decision to go to school full time may mean you cannot work full time. is what you give up by making a choice. This cost, commonly referred to as the trade-off of a decision, cannot always be measured in dollars.Opportunity cost is what you give up by making a choice. This cost, commonly referred to as the trade-off of a decision, cannot always be measured in dollars.
- Decision making will be an ongoing part of your personal and financial situation. Thus, you will need to consider the lost opportunities that will result from your decisions.
- Evaluating Risk
- Uncertainty is a part of every decision. Selecting a college major and choosing a career field involve risk. What if you don’t like working in this field or cannot obtain employment in it?
- Other decisions involve a very low degree of risk, such as putting money in a savings account or purchasing items that cost only a few dollars. Your chances of losing something of great value are low in these situations.
- In many financial decisions, identifying and evaluating risk is difficult. The best way to consider risk is to gather information based on your experience and the experiences of others and to use financial planning information sources.
- Financial Planning Information Sources
- Relevant information is required at each stage of the decision-making process. Changing personal, social, and economic conditions will require that you continually supplement and update your knowledge.
Step 5: Create and Implement a Financial Action Plan
- In this step of the financial planning process, you develop an action plan. This requires choosing ways to achieve your goals. As you achieve your immediate or short-term goals, the goals next in priority will come into focus.
- To implement your financial action plan, you may need assistance from others. For example, you may use the services of an insurance agent to purchase property insurance or the services of an investment broker to purchase stocks, bonds, or mutual funds.
Step 6: Reevaluate and Revise Your Plan
- Financial planning is a dynamic process that does not end when you take a particular action. You need to regularly assess your financial decisions. Changing personal, social, and economic factors may require more frequent assessments.
- When life events affect your financial needs, this financial planning process will provide a vehicle for adapting to those changes. Regularly reviewing this decision-making process will help you make priority adjustments that will bring your financial goals and activities in line with your current life situation.
Financial planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make effects other areas of your finances. Buying a particular investment product might help you pay off your mortgage faster or it might add corpus to your retirement significantly .By Viewing each financial decision as part of the whole ,you can consider its short & long term effects on your life goals.