According to the Certified Financial Planner Board, “financial planning is the process of meeting your goals through proper management of your finances”. While financial planning can be complicated for ‘high net individuals’, it is fairly simple for ordinary people if they know the basics.
So what are the basics of financial planning?
1) Set your goals
The purpose of financial planning is to achieve set goals or dreams. Take time to consider the goals that you want to achieve. Your goal might be buying a home, car, well funded retirement or any other goal that you might have. Rank your goals according to importance. While it is good to have goals, it is unreasonable to set goals that are not achievable. A retirement goal means you should always fund your 401(k) to take advantage of its tax benefits. If everything seems difficult for you from the start, there are professionals who can help you. You could hire a Certified Financial Planner to go through the process with you. You could also buy financial planning software to help you with the process. If you can do without these, make sure you record all the information.
2) Evaluate your financial status
This is the time for a self evaluation. You can take advantage of this stage to do a bit of ‘house cleaning’. Get rid of unnecessary high interest debts that you have and concentrate on things that matter. You should ask yourself questions and provide reasonable and realistic answers. Are your goals reasonable compared to your finances? What can you do to improve your finances and to reduce your expenditure? It is wise to go thoroughly a list of your expenses and eliminate or reduce some where possible.
3) Gathering relevant information
An important part in financial planning is getting the relevant information. You need all the necessary information before you make a decision. Compare different deals to get the best deal at a reasonable price. You should also find out the effect of your credit score on various deals. Many people pay higher interest rates because of overlooking the effect of their credit score on a deal. If your rate is not good, it may be best to work on it before attempting to enter into mortgage transaction.
With all the information you need on hand, you can now plan how you are going to move towards your goal. Are you going to make monthly payments, or use stop order facilities? Stop order is recommended for people with little financial discipline, so that the money does not come into their hands. Have a monthly budget that you work with.
Take your plan and go through it step by step. Take note of problematic so that you can address them. Implementation is usually faced with problems here and there as the plan takes shape. Solve the problems and move on. Make sacrifices bearing in mind that a little sacrifice now will bring greater returns tomorrow.
6) Monitoring and evaluation
Choose a period after which you can sit down and evaluate your progress. Since self evaluation is difficult, you could get someone to do it for you.
Financial planning is a long term and life long process. It can never be too late to start if you can put your heart to it.