05 Mar Financial Planning: A 6-Step Process

Financial planning is crucial for preparing for the future. It helps you track your income and savings, achieve your goals, prepare for emergencies, reduce and manage debt, secure your retirement, and grow your wealth and investments. It also helps you optimise your tax efficiency and maintain peace of mind financially.

What Is Financial Planning?

Financial planning is the process of managing your finances and structuring them so that you efficiently achieve your goals. It involves assessing your current financial situation, setting objectives, and creating a strategy to reach them through budgeting, saving, investing, and risk management.

To help you effectively financially plan, we’ve put together six essential steps:

• Assessment
• Setting goals
• Budgeting and expense management
• Debt management
• Risk management and insurance planning
• Tax planning
• Estate planning

Together, these steps will aid in creating financial preparedness, securing you a financially viable and peaceful future. Let’s discuss these steps in more detail.

Six Steps to Financially Plan

Let’s start off with assessment, then move on to goals, managing your budget, managing debt, and then planning for risk, taxes, and your estate.

Assess Where You’re At

Start by evaluating your income, expenses, assets, and liabilities. Understanding how much of your assets and income covers your liabilities and debts will give you a clearer picture of how you might best reduce expenses and use your remaining income to manage risk.

This will also help you calculate your net worth (he value of all of your assets subtracted by the total of all of your liabilities) and cash flow (your total income). Decide on what you would like to achieve with financial planning. This could be:

• Preparing for the future
• Managing risk
• Freeing up extra cash
• Budgeting better

After you’ve ascertained the above, it’s time to set goals.

Set Goals

There are two types of goals you should set: long-term and short-term.

Long-Term Goals

These are goals that you’ll achieve in the long term, like buying a house or car. It could also be reaching a certain savings threshold or saving for retirement.

Short-Term Goals

Short-term goals are goals you focus on reaching in a few months to years, like paying off your credit card or building an emergency fund.

Budgeting and Expense Management

Budgeting is a sort of map, and expense management helps you follow this map. Your budget outlines how you intend to spend your money, while expense management tracks how you spend it. When you compare the two, you can identify areas where you can cut back on spending and better manage your money.

How to Budget

To budget, decide the period you would like to plan for – say a month, three months, or a year. This will help you forecast how you’ll cover expenses and reach financial goals. Divide your income into categories, like debt repayments, food, electricity, etc.

How to Manage Expenses

Expense tracking is tracking your money to see where it actually goes. This is how much you spend on going out, alcohol, subscriptions, and more. Using expense tracking, you can identify areas to cut back on.

You can use a spreadsheet to track how your spending changes over time and when you unnecessarily spend the most. If you can, identify areas where you can cut back. Don’t be too hasty to cut spending in areas like fun.

Instead, set a limit for how much you’ll spend on going out and other unnecessary expenses since, realistically, you’ll likely spend on this anyway. It’s better to have a set limit than no limit at all.

Saving and Investment Planning

Saving and investing involves creating an emergency fund and investing in assets like stocks, bonds, real estate, and mutual funds to grow wealth.

Emergency Fund

Emergency funds are crucial to ensure financial stability in times of uncertainty. For instance, if your car breaks down, you could use your emergency fund instead of taking out an expensive payday loan, which could lead to high debt and exorbitant repayments, potentially jeopardising your financial future.

Investing in Assets

Investing in assets is useful to your overall wealth and financial portfolio in that they’re the gift that never stops giving. Assets like stocks and funds offer a return on investment because they usually appreciate over time. Moreover, when you resell assets (such as houses) and stocks, you’ll likely take home a profit, adding to your wealth.

Debt Management

Debt reduces your wealth by necessitating repayments and costly interest. The average APR (interest rate) for unsecured credit starts at 20% – that means people pay a fifth more on their principal amount, adding to their overall repayments.

You should keep a small amount of debt and pay it off in full and on time to increase your credit score to improve your chance of being approved to take out other debt – good debt and loans, such as a mortgage or vehicle finance.

Work out how much you pay on debt each month and try to keep your overall payments to 20% or less of your total income. If you have too much debt, consider debt clearance methods like debt review.

Risk Management and Insurance Planning

You should protect your assets with insurance in case of an emergency. This involves taking out car insurance, life insurance, and any other insurance applicable to assets of high value, such as home contents insurance (short-term insurance). Life insurance provides a death payout when you die. You can also take out term life insurance if you become disabled or unable to work.

Retirement Planning

Planning for retirement ensures you’ll have enough money when you decide to stop working. You can invest in retirement by either saving by yourself or through a retirement annuity. Retirement annuities work sort of like a fixed-term savings account. They have compound interest that grows the amount of savings you put in, ensuring your wealth grows over time and you’re able to afford to retire.

Tax Planning

Enlist a tax consultant or financial advisor to help you become more tax efficient through deductions, donations, and tax-efficient investments. Don’t do this yourself, as you might misunderstand tax law and become legally liable for payments you miss.

Estate Planning

Estate planning involves planning a will to designate assets, such as your assets and properties, to beneficiaries after you die. You should create a will, trust, and power of attorney documents.

Let Credit Boost Help You Financially Plan

We can help you manage your debt with short-term insurance, life insurance, boosting your credit score, estate planning, and creating good debt to help you build wealth in the long run. To learn more, contact us today. We would love to help you achieve financial stability.