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Importance of Financial Planning for Families and Individuals

Realizing the importance of financial planning can help you get started on the way to building wealth vs. falling into a lifetime pattern of debt and paycheck to paycheck living.

True financial planning is a tool for control of your financial future and is a major component of your overall wealth creation plan.

Unfortunately the term "financial planning" has become the disguise used by salesmen trying to push commission based financial products like insurance and mutual funds.

So make sure you understand that a financial plan should not be confused with a financial product as it is often used by some so called "financial planners".

Definition of Financial Planning

To understand the importance of financial planning for you and me lets understand the definition of financial planning.

It can be described as a tool that allows us to define our financial goals, asses our current financial situation and allows us to plan what we need to do to achieve those goals. As such, it then becomes a document (yes, a financial plan must be written) that is tailored to YOU, where you are, what you want in life and how your finances are going to help you achieve that.

Keys to Financial Planning

If by this point you are beginning to better understand the importance of financial planning then it might help you to see some of the advantages of putting one together:

  • Financial planning is important whether you have a lot of money or not - It’s easy to assume that financial planning is for those with a lot of money. But reality is that financial planning is for managing what you have and where you want to go, regardless of quantity. So if you don’t have or make a lot of money, would you want to have/earn more?...Plan for it. On the other hand if you have/make a lot of money, do you have a plan on how you are going to use it, protect it, multiply it?
  • Plan for retirement Plan for financial independence – create wealth - I am not a fan the conventional idea of retirement. Instead I consider achieving financial independence instead of retirement. The idea of retirement is derived from an era when companies paid pensions to retired workers and Social Security was something you could count on.

    On the other hand financial independence means that you no longer depend on a source of income (a job) for your financial security. Instead you have created multiple sources of income, have accumulated assets and possibly own a business all of which contribute to you not depending on someone else for your income - you have achieved wealth. Whether you retire or not is up to you. If this is a goal of yours then your financial plan must reflect it.

  • importance of financial planning
  • Define your financial goals and why you want to achieve them - Have you sat down to think how much money you want to have and why? Do you want to pay for your kids colleges? Own your home free and clear? A vacation property? Travel around the world? Own investment real estate? Be debt free?...Those and many more can be financial goals, but you need to determine first why you want them and then have a plan to achieve them.
  • Eliminate debt from your life - Part of the financial freedom equation is being debt free. But if you are overwhelmed with debt or just want to make sure you are free of any debt at some point then guess what?...You have to plan for it.
  • Promote security, protect yourself and your family - Part of the importance of financial planning is making an assessment of the risks your are faced with and what you can do to protect yourself and loved ones.

    Whether you are a single individual who might have a loved one that would be vulnerable if you passed away, or if you are a parent that would like to protect his spouse and/or children in case something were to happen to you. By assessing the risks that you are faced with and possible consequences as part of your financial plan you will be able to make decisions regarding life, health, disability, home, car insurance and more. Also consider wills, trusts, power of attorneys, property titles and more. With the help of an accountant and lawyer you can incorporate these into your financial plan.

  • Determine your cash flow, savings and investing strategies - By looking at all your income and expenses you will be able to develop a budget which is the first step in avoiding the number one cause of financial ruin – spending more than you make. In turn this will allow you to find money that instead of spending you can allocate to saving and investing. You can then decide how much to save and to invest, where that money is going to go, how often, and how you are going to keep it growing.

Hopefully these keys to financial planning will let you see the importance of financial planning regardless of your financial situation. If you are single and starting out, a recently married couple or a family of four, there is a financial plan for you.

Remember that even a simple and basic financial plan is better than no plan. If you sit down and consider your own circumstances you will see you don’t need a complicated strategic plan to benefit from personal financial planning.

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