Financial planning is a “big picture” approach to estimating what your financial needs might be over time. It is a financial roadmap that involves budgeting and saving, debt, taxes, insurance, investments, and retirement planning. Careful financial planning will help you meet your current financial needs and keep you prepared for the future.
Budgeting is a primary element of financial planning. A budget helps you to keep track of your income and expenses. If your income is greater than your expenses, you'll be able to save money. If the reverse is true, you may be accruing debt. By looking at your overall financial picture, you can determine if your income is sufficient, if your costs are too high, or if you need to save more to achieve your financial goals.
Financial planning not only helps you to take a look at all of your income and expenses, it also prepares you for the unexpected. For example, financial planning involves calculating expenses such as taxes and insurance costs. Taxes must be paid on all income, which means that you can't always count on keeping all of the money you earn. Insurance is an important element of any financial plan because it's a way to pay a smaller amount, or premium, to avoid a potentially larger cost that could bring on a financial crisis.
Part of your financial plan should include an emergency fund or financial “safety net” of three to six months of monthly expenses. Building this financial cushion is going to mean spending less than you earn so the excess can be put away. Your plan should also include ways to save for your financial goals, like paying for college; and longer-term savings plans like buying a home and retirement.
A good way to earn extra income to help achieve your financial goals is through investments. Investing is a way to generate income by buying a financial instrument or item of value such as stocks, bonds or real estate that may provide a greater return over time than the interest rate you'll get with a savings account. Essentially, investing is spending money with the hope of making more money. Keep in mind that investing involves some degree of risk. There is no guarantee that every investment is going to make money. In fact, investments can also lose money so you may want to consult with an expert before making any significant investment decisions.
Financial planners are experts at helping you to set financial targets and take the right steps to meet those targets. A financial planner can help you develop a financial strategy that makes sense for you. While some elements of planning, like calculating taxes and retirement needs and making sound investments can be challenging, they are essential to ensuring your financial security.