Why Is Financial Planning Important
"What gets measured, gets improved", is a common saying that's been going around the blogosphere for a while now. It applies to all aspects of your life, such as meeting a daily calorie goal or walking 10,000 steps.
The same applies to your finances as well. Without proper financial planning, you are just meandering in a random direction without purpose or meaning.
With good financial planning, you assess your current financial situation, determine your financial goals, and create a roadmap to achieve those goals. While financial planning is an essential aspect of personal finance, many individuals still overlook its significance.
In this article, we will explore why is financial planning important, no matter what your life circumstances, and how it can profoundly impact your life.
Setting Clear Goals
An airplane is off course 90% of the time when it's in the air, because of weather conditions, turbulence, and other factors. How does it get to the right destination then? Because it knows exactly where it's going and it's constantly course correcting.
This applies to your financial future as well. The financial environment can be quite chaotic and tumultuous.
That could mean your finances might not be on course 100% of the time. However, with proper financial planning, you have a structured framework to identify and define your financial goals. That is, where you wish to get to.
Whether it's saving for a comfortable retirement, purchasing a home, funding your child's education, or starting a business, having clear financial objectives is the first step toward achieving them.
Once you have a roadmap in place, it becomes easier to make decisions and allocate resources in a way that aligns with your aspirations.
Improved Financial Management
Do you know how much money you have in your bank account right now? It doesn't have to be an exact amount but you should have a bit of an idea of the amount.
A well-structured financial plan allows you to keep track of your income, expenses, assets, and liabilities. This increased awareness of your financial situation helps you manage your money more effectively.
By monitoring your cash flow, you can identify areas where you may be overspending and make necessary adjustments to ensure your financial well-being.
Emergency Preparedness
They say the only constant is change.
Life is full of unexpected twists and turns, and having a financial plan in place can provide a safety net during challenging times. It can help you set aside an emergency fund. This is crucial for handling unexpected expenses like medical bills, car repairs, or job loss.
Financial planning ensures that you are not caught off guard and can maintain your financial stability in emergencies.
Wealth Accumulation
One of the primary goals of financial planning is to accumulate wealth over time. This includes investments in various assets like stocks, bonds, real estate, and retirement accounts.
You can and must take advantage of the 8th Wonder of the World, compound interest, in this manner.
By having a strategic investment plan, you can maximize your returns and grow your wealth, ensuring financial security and opportunities for your future.
Debt Management
It's okay to use debt strategically in the earlier years of your life to get at your financial goals. But as you get close to retirement, getting rid of your debt should become a priority.
By analyzing your current debt situation and creating a plan for paying off loans and credit card balances, you can take steps to become debt-free.
Reducing debt not only improves your financial health but also allows you to redirect funds toward more productive purposes, such as investments or savings.
Retirement Planning
With the uncertainty of government social security benefits and the rising cost of living, a well-thought-out retirement plan is essential.
Financial planning helps you determine how much you need to save and invest to ensure a comfortable and financially secure retirement.
Tax Efficiency
By understanding the tax implications of your financial decisions, you can take advantage of tax deductions, credits, and exemptions, ultimately reducing your tax liability.
Minimizing your tax burden means more money available for savings and investments. And this means you can take further advantage of compound interest to have even more savings for retirement, for your children, or for whatever other purpose you desire.
Education Funding
If you have children or plan to pursue higher education, financial planning can help you save for these educational expenses. College tuition costs continue to rise. According to FinAid, college tuition rises at twice the inflation rate.
Starting an education fund early will ease the financial burden when the time comes.
Protection Against Inflation
Inflation erodes the purchasing power of your money over time. Financial planning takes inflation into account and helps you invest in assets that have the potential to outpace inflation, protecting your wealth from depreciation.
There's nothing worse than working all your life to build your investments and assets, only to realize that you didn't save enough. And you are going to run out of money midway through your precious retirement.
No one wants to go back to work in their 70s or 80s because of this blunder.
Legacy and Estate Planning
Planning your estate ensures that your assets are distributed according to your wishes and minimizes the financial burden on your heirs. Without a proper will in place and estate planning, all your hard-earned money will end up going to the government, rather than your heirs.
Estate planning can include drafting a will, setting up trusts, and designating beneficiaries for your various accounts.
Peace of Mind
Knowing that you have well-thought-out finance strategies set up for your future can reduce stress and anxiety related to money. 90% of Americans stress about money. This means folks from all avenues of life are feeling anxious about their financial situation.
Financial planning might not be the most glamorous thing in the world. But it frees you up from stress about money and allows you to focus on other aspects of your life, such as personal and professional growth.
Financial Independence
What does financial independence mean to you? For some, it means having enough resources to cover their living expenses and support their desired lifestyle without the need for employment.
For others, it means being able to travel throughout their retirement without worrying about costs or expenses.
Whatever your meaning of financial independence, you can use financial planning to get at it. However you wish to live your life, you can. All you have to do is put in some time planning it out right now.
Improved Decision-Making
Do you know why you made the financial decisions you made in the past? Was it due to a well-thought-out plan for the future, or did you make it in haste because you panicked or were on a deadline?
Whether it's choosing between different investment options, assessing the affordability of a major purchase, or deciding when to retire, having a financial plan in place gives you a solid foundation on which to base your choices.
This way you can make solid, intelligent decisions that bring you closer every single day to your financial goals.
Adjusting to Life Changes
Life is unpredictable, and financial planning allows you to adapt to changes as they occur. Whether you get married, have children, change careers, or face unexpected health issues, your financial plan can be adjusted to accommodate these life changes. You can ensure you remain on track to meet your goals, whatever they might be.
You can also adjust to any changes that your children or heirs might have. For example, one of them could lose their job and you could accommodate them in your financial plan to support them through their tough time, if need be. Or you could send your grandchildren to the school of their choice because you have the financial ability to do so.
Long-Term Financial Security
Ultimately, financial planning is about ensuring your long-term financial security. It's about building a financial cushion that can withstand economic downturns, health crises, and unforeseen expenses.
With a well-executed financial plan, you can navigate life's uncertainties with confidence.
Life can sometimes be longer than you realize. You might think you might only live until 80 or so, but what if you end up staying alive until you are a centenarian? A long life requires long-term planning and thinking.
A financial plan can help you do that without worrying about running out of cash at a crucial moment in time.
Why Is Financial Planning Important?
Now you know the answer to the question, "Why is financial planning important for anyone who wants to live their best life?" No matter what your goals or aspirations are, financial planning can help you get there.
At Phillip James Financial, our fee-only advisors will help you build an intentional financial plan that works for your life circumstances. It will save you time and grow your wealth with purpose.
Set up an appointment with our financial advisors to chat about your goals and how you can get there faster with our professional help.