Financial planning is a key part of everyone’s life. We all do it, whether we think so or not, but not always in the formal sense. Whether you’re planning on buying a house or working out your budget for the month, this all forms a part of financial planning, even if it’s just a small part. But, in the grand scheme of things, formal financial planning involves planning to have more official short- and long-term planning, including your retirement plans, saving for a house or even your kids’ education.
But what are the essentials of having a good financial plan? In a financial plan, there are some essentials that need to be incorporated into it. In this article, we’ll discuss these essentials and give you tips on how to incorporate them.
Why you need a good financial plan
As an individual or family, having a financial plan is the best way to use your money effectively to plan for the future. Financial planning includes insurance, estate planning, and investments designed to safeguard your financial well-being and grow your financial portfolio.
In most cases, people contact a financial planner or advisor to help them plan for the future. This person will usually offer products and investment strategies that will protect a person in the event of an accident or crisis. Likewise, the investment strategies they suggest are designed to help grow a person’s financials over time to help them achieve their financial goes or plan for retirement.
The importance of having a good financial plan lies in the consequences of not having one. Currently, a large number of older citizens are retiring in the middle to low-income range because they have failed to save for retirement. As a result, their quality of life is low, and many of them have to find work to sustain themselves.
This is a lesson for those who are young, showing them the importance of using their finances wisely in their youth. An aspect of this is planning for retirement and building a good asset portfolio, of which financial planning is required.
Financial Planning Essentials
Without further adieu, here are the essentials required for a good financial plan:
Financial goals
Setting appropriate and realistic financial goals is essential to any financial plan. Considering the fact that you can’t exactly create a plan without knowing what you want to achieve, goal setting will be at the center of your financial plan. When it comes to setting goals, a financial planner will usually guide you in establishing a short-term and long-term plan.
Short-term goals usually span from a few months to a few years in duration. For example, if you want to buy a house in the next few three years, this would be a short-term plan and would probably result in a higher-risk-greater reward investment strategy.
Long-term goals refer to goals that are much farther off, like saving for retirement. These goals usually involve safer, more stable investments that’ll have a significant payoff over the span of your life.
Budget and cash flow planning
Setting a budget is where the practical outworkings of your finances take place. Budgets allow you to allocate finances to where they need to go. In this case, a significant part of your budget would be allocating finances to your various financial investments and insurances.
Having a financial plan also helps you filter out what’s essential in your budget and what isn’t. Think of it as a list of financial priorities. At the top, you’ll have your essentials, which include your investments and insurance, and as you go down the list, you move to aspects that aren’t as important, like the latest iPhone model if you’re phone is still fully functional.
Managing debt
Not all debt is bad debt, but bad management of debt can quickly make it take a turn for the worse. For instance, having a mortgage on your house is great; you’re actively paying off an asset. However, other kinds of debt, like credit card debt, can heavily influence your credit score, especially because the ratings are so much higher here.
A key part of your financial plan would be managing good debt and reducing bad debt. This might entail setting a monthly amount to pay off credit cards while having another debit order every month to pay off your mortgage.
Planning for retirement
We cannot stress enough the importance of saving for retirement! In Australia, there are several ways that you can save for your retirement, including a superannuation fund and a pension fund. According to statistics, two-thirds of your current salary should be what you plan to receive during your retirement. Financial planners will work out the amount you need to put away per month to achieve this result. As suggestions go, the suggested amount you should put away every month is about 15% of your current salary.
A rainy day savings
Life is unpredictable and often, there are some unexpected expenses that fly at you within a month that you need to be prepared for. This might be a flat tyre or a health issue that suddenly rises. Either way, having some money set aside to cover what your insurance won’t is essential. This doesn’t have to be a hectic amount of money. The suggested amount is about three months’ worth of your current salary.
Insurance
Getting insurance is important as there are some expenses that are simply impossible to cover on the fly. For example, say your house is broken into and cleaned out. Do you have the funds to replace everything you own? You might say yes here, but for the average Joe, this isn’t a possibility. That’s where household insurance comes in. There are several types of insurance one can take out, including:
- Medical or health insurance
- Car or homeowners insurance
- Life insurance
- Career Insurance
- Credit insurance
Estate planning and management
Lastly, as you grow older and develop your career, you purchase assets, sometimes more than one. Managing these assets and who they pass to when you die is also an essential part of financial planning.
Final Thoughts
The best way to set up a good financial plan that covers all the essentials is to contact professional financial planners like Solace Financial Planners. They’ll assess your current financial position and your goals and help your plot and path to achieving them.