Why Is Financial Planning Important?

No one can look into the future and tell you how to invest your money. The closest thing to a crystal ball is taking time to understand and implement the basics of financial planning. When you have a financial plan, you put yourself in a better position to budget, borrow, save, and achieve your goals.

The Basics

Financial planning starts by getting an overhead view of your finances. By calculating your net worth, we have a better picture of your cash flow and your priorities. Once that happens, we can dive deeper into these sub-finance categories:

  • Budgeting
  • Setting goals
  • Preparing for emergencies
  • Borrowing wisely
  • Retirement

There are more, but we are just going to focus on these for now.

Budgeting

A budget goes a long way when it comes to your finances. It’s essential to get the big picture look to determine whether you are spending within your means or going over. To create a budget, calculate your monthly fixed expenses, such as student loans, mortgage/rent, car payments, etc., and add them to your variable expenses. Your variable expenses will be costs that fluctuate each month, such as your electric bill, groceries, gas, etc. Also, don’t forget to leave room and factor in “fun” stuff like clothing, gifts, household goodies, travel, and other entertainment. Once you have an expense total, you need to subtract it from your monthly income.

Income – Expenses = Net Income (What you have left over from your income or how much you have gone over budget)

If you have a negative number, then you need to re-evaluate what you are spending your money on. If you are in the green, consider putting it in your savings account for a rainy day!

Setting Goals

Where do you see yourself in five years? Will you be living out your suburban dreams in a new house or traveling in style with a new car? Or, maybe you have an early retirement goal! Once you have set some attainable goals, you can prioritize your spending and savings appropriately. For example, if you plan on buying a car within the next five years, you should start saving up a down payment to help cover the cost. That way you aren’t having to take out more money than needed for your loan.

So, defining your goals helps understand your financial picture and make the best-informed decisions toward achieving your goals.

Preparing for Emergencies

As we said, there isn’t a crystal ball. That’s true for unexpected emergencies as well. If we knew ahead of time when things would break, we could properly save money and be prepared. That’s not the case; they’re called emergencies for a reason. The best anyone can do is set designated funds aside for emergencies. That fund may not cover the total cost of a roof repair or foundation repair, but at least the funds get you farther than having nothing set aside.

Or, someone could unexpectedly lose their job. If you depend on them to keep the lights on, it’s best to have that emergency fund aside for these unexpected circumstances. Being prepared to the best of your ability is better than hoping nothing unexpected ever happens. The usual rule of thumb is to save up at least 3 months of your income to cover expenses, but if that’s intimidating, just focus on the first $1,000. Once you reach that, you can build on your momentum to save a month of expenses on to eventually reaching three months!

Borrowing Wisely

We don’t expect you to pay for a house or brand new car with your out-of-pocket cash. If you can, that’s great! You’re financially free to do whatever you want with it. If you rely on the assistance of loans, then don’t worry. Almost everyone does as well. A loan isn’t a bad thing, it just helps you achieve your goals a little bit faster. With that said, you still need to make sure you can comfortably afford the items you bought with loans. Don’t expect to purchase a $500,000 home with a small income. A loan is supposed to help, not be a crushing weight that you can’t pay off in the future. Even with credit cards. Once you’ve been approved, it’s best not to push that limit every month, especially if you can’t pay the minimum. When it comes to borrowing money, borrow it wisely. Otherwise, your long-term goals may be hindered by the weight of debt.

Retirement

Unless you plan on working for the rest of your life, retirement planning is essential and should be started as early as possible. Retirement can be saved through an employer-sponsored retirement plan, like a 401(k), or you can look into an Individual Retirement Account, also known as an IRA. Both provide saving tools to get you on the right timeline for retirement.

At the end of the day, you should feel confident with your money, and should align with your lifestyle and goals. If you need help, consider a financial planner. These experts know the ins and outs of money and can to guide you toward the right path to accomplish your goals. Check your local credit union if they have one of these experts onsite or can point you in the right direction.